Economic Despair

Month after month, the numbers from the nation's housing market deteriorate. -- Sales of new homes have plunged even more than expected to their lowest level in more than 12 years, leaving the market glutted with unsold homes and pointing to more trouble ahead for the battered housing market.

New home sales tumbled 9 percent in November to a seasonally adjusted annual rate of 647,000, according to a Census Bureau report Friday.

That was the worst showing since April 1995, when the pace of sales was 621,000, and is much worse than the 715,000 sales pace forecast by economists surveyed by

The credit crunch has hit banking sector payrolls. Let the downsizing begin.

(Reuters) - Merrill Lynch & Co (MER.N) plans to announce about 1,600 layoffs after disclosing fourth-quarter write-downs, CNBC reported on Thursday. The layoffs are likely to be in trading positions and related areas, and will not likely include the investment banking or private client groups, CNBC's Charlie Gasparino reported. Merrill Lynch had about 64,000 employees as of the end of September, so 1,600 layoffs would represent less than 3 percent of its work force

When the mess from the housing collapse finally clears, we will see that mortgage fraud was one of the main drivers behind rising prices. Easy credit made it easy to steal,

ATLANTA -- Skyrocketing foreclosures are a testament to how easy it was to borrow from mortgage lenders in recent years.

It may also have been easy to steal from them, to judge from a multimillion-dollar fraud scheme that federal prosecutors unraveled here in Atlanta. The criminals obtained $6.8 million in mortgages from Bear Stearns Cos., including a $1.8 million mortgage to Calvin Wright, a New Yorker who told the investment bank that he and his wife earned more than $50,000 a month as the top officers of a marketing firm. Mr. Wright submitted statements showing assets of $3 million, a federal indictment alleged.

In fact, Mr. Wright was a phone technician earning only $105,000 a year, with assets of only $35,000, and his wife was a homemaker. The palm-tree-lined mansion they purchased with Bear Stearns's $1.8 million recently sold out of foreclosure for just $1.1 million. Bear Stearns, meanwhile, posted the first quarterly loss in its 84-year history as it wrote down $1.9 billion of mortgage assets yesterday. (See related article.)

Fraud goes a long way toward explaining why mortgage defaults and foreclosures are rocking financial institutions, Wall Street and the economy. The Federal Bureau of Investigation says the share of its white-collar agents and analysts devoted to prosecuting mortgage fraud has risen to 28%, up from 7% in 2003. Suspicious Activity Reports, which many lenders are required to file with the Treasury Department's Financial Crimes Enforcement Network when they suspect fraud, shot up nearly 700% between 2000 and 2006.

In 2006, losses from fraud could total a record $4.5 billion, a 100% increase from the previous year, says Arthur Prieston, chairman of the Prieston Group, which provides lenders with mortgage-fraud insurance and training. The surge ranges from one-off cases of fudging and fibbing to organized criminal rings. The FBI says its active mortgage-fraud cases have increased to 1,210 this year from 436 in 2003. In some regions, fraud may account for half of all foreclosures. "We've created a culture where a great many people know how to take advantage of the system," says Mr. Prieston.

If 2007 was the year of subprime, 2008 will be the year of credit card defaults. The banks are loaded with unsecured debt, and the US consumer is overloaded. Defaults are rising, and things will get much worse, particularly if the economy slips into recession.

SAN FRANCISCO - Americans are falling behind on their credit card payments at an alarming rate, sending delinquencies and defaults surging by double-digit percentages in the last year and prompting warnings of worse to come.

An Associated Press analysis of financial data from the country’s largest card issuers also found that the greatest rise was among accounts more than 90 days in arrears.

Experts say these signs of the deterioration of finances of many households are partly a byproduct of the subprime mortgage crisis and could spell more trouble ahead for an already sputtering economy.

“Debt eventually leaks into other areas, whether it starts with the mortgage and goes to the credit card or vice versa,” said Cliff Tan, a visiting scholar at Stanford University and an expert on credit risk. “We’re starting to see leaks now.”

The value of credit card accounts at least 30 days late jumped 26 percent to $17.3 billion in October from a year earlier at 17 large credit card trusts examined by the AP. That represented more than 4 percent of the total outstanding principal balances owed to the trusts on credit cards that were issued by banks such as Bank of America and Capital One and for retailers like Home Depot and Wal-Mart.

At the same time, defaults — when lenders essentially give up hope of ever being repaid and write off the debt — rose 18 percent to almost $961 million in October, according to filings made by the trusts with the Securities and Exchange Commission.

Serious delinquencies also are up sharply: Some of the nation’s biggest lenders — including Advanta, GE Money Bank and HSBC — reported increases of 50 percent or more in the value of accounts that were at least 90 days delinquent when compared with the same period a year ago.

The AP analyzed data representing about 325 million individual accounts held in trusts that were created by credit card issuers in order to sell the debt to investors — similar to how many banks packaged and sold subprime mortgage loans. Together, they represent about 45 percent of the $920 billion the Federal Reserve counts as credit card debt owed by Americans.

Until recently, credit card default rates had been running close to record lows, providing one of the few profit growth areas for the nation’s banks, which continue to flood Americans’ mailboxes with billions of letters monthly offering easy sign-ups for new plastic.

Even after the recent spike in bad loans, the credit card business is still quite lucrative, thanks to interest rates that can run as high as 36 percent, plus late fees and other penalties.

But what is coming into sharper focus from the detailed monthly SEC filings from the trusts is a snapshot of the worrisome state of Americans’ ability to juggle growing and expensive credit card debt.

The trend carried into November. As of Friday, all of the trusts that filed reports for the month show increases in both delinquencies and defaults over November 2006, and many show sequential increases from October.

Discover accounts 30 days or more delinquent jumped 25,716 from November 2006 and had increased 6,000 between October and November this year. Many economists expect delinquencies and defaults to rise further after the holiday shopping season.

Mark Zandi, chief economist and co-founder of Moody’s Inc., cited mounting mortgage problems that began after this summer’s subprime financial shock as one of the culprits, as well as a weakening job market in the Midwest, South and parts of the West, where real-estate markets have been particularly hard hit.

“Credit card quality will continue to erode throughout next year,” Zandi said.

Filing for bankruptcy is no longer a solution for many Americans because of a 2005 change to federal law that made it harder to walk away from debt. Those with above-average incomes are barred from declaring Chapter 7 — where debts can be wiped out entirely — except under special circumstances and must instead file a repayment plan under the more restrictive Chapter 13.

Credit standards tighten further, just one more reason why the housing market isn't about to recover any time soon:

(Washington Post) Call it the credit risk hangover after the housing boom binge. Home buyers and refinancers who cannot come up with sizable down payments and whose FICO credit scores are below 680 are about to get squeezed in the mortgage market.

Fannie Mae and Freddie Mac are imposing significant increases in fees for a range of borrowers with down payments of less than 30 percent who formerly were treated as "prime" credit applicants. At the same time, the two largest private mortgage insurers -- MGIC and PMI Group -- are raising premiums on consumers who have low down payments and scores in the mid- to upper 600s on the FICO scale developed by Fair Isaac Corp. The added costs for some home buyers could total thousands of dollars, either at settlement or in the form of higher interest rates.

Each company says it has experienced unexpectedly high losses on loans with these characteristics and must revise prices upward to handle the elevated risks. But some mortgage bankers and brokers say the higher costs and down payments will make homeownership impossible or very difficult for a large number of borrowers and will slow a housing market recovery.

Although Fannie Mae's and Freddie Mac's revised fees won't take effect until March 1, major lenders who sell loans to the two investors began imposing the surcharges on applicants this month. Some mortgage loan officers are upset that clients with FICO scores close to 700 -- far above the once-traditional 620 cutoff point between "prime" and "subprime" -- are being charged more.

"This is outrageous," said Steven Moore, a mortgage broker with 1st Solution Mortgage in Falls Church. "On a loan of $300,000 and with a credit score of 675 -- which is not a bad score -- and a 75 percent loan-to-value ratio (25 percent down payment), the cost is an additional $2,250 per loan." If the same borrower wants to do a cash-out refinancing to consolidate debt, the new Fannie-Freddie fee schedule will add another $1,500 to total costs on a $300,000 mortgage, Moore said. On a $400,000 loan, he estimates the extra fees would total $5,000.

From the Wall Street Journal.....

U.S. Mortgage Crisis Rivals S&L Meltdown

The home has long been the bedrock asset of most American families. Now, its value has become the biggest question mark hanging over the global economy and financial system.

Over the past decade, Wall Street built a market for more than $2 trillion in securities sold globally and backed by loans to U.S. homeowners on two long-accepted beliefs and one newer one. The prevailing logic: The value of the American home would never fall nationwide, and people would almost always make their mortgage payments. The more recent twist: Packaging mortgage loans and turning them into securities would make the global economy more resilient if anything went wrong.

In a matter of months, though, much of the promise of the new financial architecture -- together with its underlying assumptions -- has proven to be a mirage. As house prices fall and homeowners default on mortgages at troubling rates, the pain has spread far and wide. An examination of the resulting crisis shows that it is comparable to some of the biggest financial disasters of the past half-century.

So far, the potential losses look manageable compared with the savings-and-loan crisis of the 1980s and the tech-stock crash of 2000-02. But the housing debacle could yet take years to work out, thanks to the sheer complexity of it. Until the mess is cleaned up, investors will remain jittery and banks will likely hold back on all kinds of lending -- a credit crunch that is already damping global growth and could tip the U.S. economy into recession.

The new financial system -- shifting risk from banks to securities markets -- has worked "pretty well" up until now, says former Federal Reserve Chairman Paul Volcker. "We're going to find out if it works well for a major-league crisis."

To ease the pain, the Federal Reserve has cut short-term interest rates twice and is expected to cut them further tomorrow. The Bush administration has also pressed for private-sector curative measures. First, it urged big banks to create a new entity to buy some mortgage-linked securities that don't have a ready market now. And a plan finalized last week calls for freezing interest payments on perhaps hundreds of thousands of qualifying homeowners whose mortgage notes are set to rise. (See a primer: Will the Rate Freeze Help You?) Both ideas are controversial. They are hailed by some as well-conceived financial first aid and criticized by others as inadequate -- or an impediment to crisis resolution.

The New York Times has stopped speculating about whether further interest rate cuts are advisable. The only question worth considering is how much.

Inflation data comes out a few days later. The numbers could be very troublesome for the Fed. The headline CPI could be has high as 4 percent.

Accelerating inflation and the Fed is cutting rates; talk about policy incoherence.

Market Week
How Much of a Rate Cut?

PERSISTENT worries about the financial system have led many traders to stop questioning whether the Federal Reserve will cut interest rates again this week and to ask instead how big the cut will be. A Bloomberg News poll of economists forecasts a quarter of a percentage point. Prices of futures contracts tied to the benchmark federal funds rate show heavy betting on a half-point move.

Komal Sri-Kumar, chief global strategist at the TCW Group, a Los Angeles fund management firm, expects a quarter-point cut when Fed policy makers meet Tuesday. That would be best for the economy and stock prices, he says. “If there is no change, then the stock market tumbles,” he said. A half-point cut may prompt a relief rally in stocks, he said, although it may also ensure that “the dollar will take one more tumble.” That could force the Fed to start raising rates later to defend the long-enfeebled currency.

“The Fed will have to walk a narrow walk and cut rates by a quarter-point,” Mr. Sri-Kumar said. He expects the rate cut to be accompanied by a statement adding up to a quarter-point’s worth of soothing words. It is likely to indicate that officials understand that “growth is more of a concern than inflation,” he said.

He cautioned that stocks’ course will also depend on how well banks perform as they struggle to quantify their exposure to bad debt and clear it from their books. “The subprime situation needs to get settled,” Mr. Sri-Kumar said. “Until this is resolved, a cut in rates alone won’t help the financial sector.”

Even if the losses are more extensive than feared, he said, the mere act of accounting for them may help financial stocks and the broad market. “If you are able to draw a line under your losses and say this is it, the reaction will be positive,” he said, “even if the institutions have substantial losses.”

The answer is fairly obvious from this article in the Wall Street Journal.

Lookahead: Gimme Gimme Gimme

Like a spoiled child awaiting holiday gifts, the stock market is stamping its proverbial foot and saying: "I want a rate cut, or else." The combination of slowing jobs growth, somewhat weakened retail sales, and continued credit and housing market distress, has investors clamoring for more assistance from the Federal Reserve.

And -- after this week's rally and September's indulgent 50-basis point move -- the market may even turn its nose up at a 25-basis point cut Tuesday when Fed policy makers meet.

Today, the US labor department provided dismal unemployment numbers. The number of newly laid off workers filing claims for unemployment benefits skyrocketed and posted the largest increase since early February.

Benefit applications reached 337,000 last week, an increase of 28,000 from the previous week - the biggest one-week surge since jobless claims jumped 42,000 the week of Feb. 10.

These numbers should come as no surprise. The combined effects of a crashing housing market and the credit crunch are starting to impact the labor market.

If anyone is in any doubt that the US economy is in trouble, then they should take a long hard look at today's results from Bank of America. It is sorry story of defaults, write-downs and poor investments.

Bloomberg - Bank of America Corp., the second- largest U.S. bank, said profit declined 32 percent in the third quarter after trading losses, defaults and writedowns cost about $4 billion.

Net income fell to $3.7 billion, or 82 cents a share, according to a company statement, missing the $1.06 a share average estimate from 16 analysts surveyed by Bloomberg. The Charlotte, North Carolina-based bank set aside $3.3 billion for potential bad loans after U.S. home foreclosures rose to a record.

Bank of America fell the most in eight months in New York trading after Chief Executive Officer Kenneth Lewis called the results unacceptable. Lewis said during a conference call that the company plans to scale back its investment banking unit after trading mistakes led to $717 million of losses.

``The next couple of quarters will be messy for Bank of America,'' said Andrew Seibert, a fund manager at Pittsburgh- based Stewart Capital Advisors, which oversees $950 million and owns Bank of America shares. ``You are only seeing the beginning. The banks will be putting up a lot of money for reserves.''

Bank of America fell $1.42, or 2.8 percent, to $48.61 in 11:02 a.m. New York Stock Exchange composite trading. The bank's shares were down 6.3 percent this year through yesterday, compared with Citigroup Inc.'s 20 percent decline and JPMorgan Chase & Co.'s 4 percent drop.

Third-quarter revenue was $16.3 billion, falling short of analysts' estimates of $17.9 billion. The year-earlier profit was $5.4 billion, or $1.18, a share. Return on equity, a gauge of how effectively the company reinvests profits, shrank to 11 percent, from 16.6 percent a year earlier.

The US construction industry sank deeper into recession last month. According to the commerce department, new home starts recorded a 10.2 percent decline and now stand at the lowest level in 14 years.

However, news from the housing market is likely to get much worse before it gets better. New building permits, a sign of future construction, declined by a staggering 7.3 percent, following on from a 4.8 percent decrease in August.

For US home builders, the current market is "challenging". In PR-speak, the word "challenging" means "total, unmitigated disaster".

Today, confidence among U.S. home builders crumbled this month to the lowest level in 16 years. The home builder sentiment index declined to 24 this month. We have to go back to January 1991 to find it at a lower reading.

Home builders certainly have plenty of problems out there to get them depressed. Inventories are high, sales are declining, prices are crashing, prospective buyer traffic is falling off and interest rates will stay at their current elevated level for months to come. Moreover, all those incentives, which have understated the true extent of the price crash,just aren't working anymore.

Things are so bad, it must be a challenge for US home builders to even get themselves out of bed in the morning.

Almost a million foreclosures were filed during the first half of this year; a rise of 56 percent compared to the same period last year. Sub prime borrowers accounted for 58 percent of those foreclosures. This is only the beginning. In the coming months, a wave of adjustable rate mortgages will reset at significantly higher interest rates, and the foreclosure rate is going to explode. With this impending flood of foreclosures, the US housing market will seize up.

Where are the foreclosure epicentres? Nevada had the highest foreclosure rate in June. It had a shocking one filing for every 175 households, more than four times the national average of one per 704. Sunny California had the second-highest rate, with one filing per 315 households. It also took the price for the most filings overall - 38,801. In fact, the Golden state has taken that dubious title for sixth months in a row.

Colorado had the third-highest rate with one foreclosure per 317 households. Florida was fourth with one per 347, followed by Arizona with one per 383, Ohio with one per 403 and Michigan with one per 420.

When will it end? No time soon, that is for sure.

In the face of overwhelming evidence of a housing market meltdown, the NAR is slowly recognising the extent of the disaster. Today, it published their latest market assessment, and further reduced their 2007 housing price forecast. The group now believe that house prices will fall by about 1.4 percent this year.

The NAR also reduced their sales forecast, suggesting that existing home sales will reach just 6.11 million this year. That is a lot of lost 6 percent commissions. Furthermore, the group now believes that housing starts in 2008 will fall to their lowest level since 1998.

Although the NAR have woken up to the the fact that 2007 will be a bleak year for realtors, denial again sets in when it considers 2008. The group believe that existing home sales will increase, and prices will recover slightly. Yeah right, 2008 will be prime time for ARM resets. The year will be marked by an avalanche of defaults and foreclosures, which will provide the ideal background for an market recovery.

A pattern is now emerging. From here on out, the NAR will produce their monthly forecast, with each press release more pessimistic than the one issued before. It will be a case of hope fighting it out with reality. Of course, reality always wins.

The great thing about following the housing market is that however bad the news might be today, you know it will be worse tomorrow. The crap just keeps pouring on. Nothing can stop it.

Today, D.R. Horton - the second-largest U.S. homebuilder - supplied the misery. According to Bloomberg, the company will report a third-quarter loss after orders tanked 40 percent. Moreover, the company conceded that there is absolutely no sign of a housing rebound.

Orders dropped in every region, with the biggest declines in California, where the number of net sales orders fell 53 percent in California. The situation was also bad in the northeast, where orders tumbled 42 percent. More worrying for their long term viability, the average price for its houses slid 12 percent to $233,672.

With D.R. Horton the bad numbers just kept-a-coming. During the third quarter, the company accepted just 8,559 home orders, compared with 14,316 in the year earlier. The cancellation rate was a staggering 38 percent. The value of houses ordered took a hammering, plunging 47 percent to $2 billion.

Unsuprisingly, shareholders of D.R. Horton took fright and sold off the stock. This morning, the stock fell 58 cents, or 2.9 percent. Since the beginning of the year, the stock has dropped 25 percent. I wonder how bad the numbers will be next quarter?

That subprime mess just won't go away. It keeps coming back like an unwanted relative at Christmas. Today, S&P announced that it may cut the ratings on $12 billion of bonds collatoralized with subprime mortgages.

What will that do for all those hedge funds and securities firms stupid enougth to buy this toxic crap in the first place. Nothing good, that is for sure. Anyone holding anything even vaguely connected with the subprime market will be taking a one way trip to Loserville.

Freddie Mac painted a desperate picture of the US housing market. According to its latest forecast, it expects that only 6.3 million homes will be sold this year; the lowest sales volume since 2001.

Residential lending will also tumble, Freddie expects the figure to drop to 2.75 trillion, the lowest since 2002. Meanwhile, it expects mortgage rates to spike at 6.7 percent this quarter; that is around 0.5 percent higher than the first three months of this year.

The big daddy of housing bubbles looks like it might be in some trouble. Over the last six months, there has been a surge in late mortgage payments. As we all know, today's late payment is tomorrow's foreclosure. The UK housing market is probably 18 months behind the market here in the US.

460,000 mortgage payments missed in the past six months as interest rates bite

Mortgage customers are feeling the pain as interest rates rise with more than 460,000 missing monthly payments in the past six months, new research shows...

Around 77,000 mortgage payments are being missed every month, the independent financial comparison website says. And it fears the number could be set to rise as the Bank of England continues to pile on the pressure.

The results of similar research conducted by in January this year revealed that homeowners were defaulting on their mortgage at a rate of around 36,000 a month throughout 2006. The company says the new figures suggest the rate of missed mortgage bills is close to doubling this year.

The Bank of England base rate has been increased by 1.25 per cent to the current 5.75 per cent since August 2006 with experts predicting that more rises could be on the way. Inevitably that has pushed up rates on tracker mortgages and standard variable rates as well as making it more expensive for people whose fixed rate deal has come to an end.

Council of Mortgage Lenders figures for the end of 2006 showed around 59,000 mortgages were three to six months in arrears.

Why are the easiest lessons the hardest to accept. Take the relationship between money and inflation. Since the Romans, people have understood that if a government produces more money, prices rise. It is as simple as that.

Does the Fed accept this most basic of economic relationships? The chart above tracks the 12 month rate rate of the most important measure of the money stock - M2. In 1995, the Fed did understand the importance of controlling the money supply. They had managed to get monetary growth down to around 1 percent a year.

Then something happened. Collectively, the FOMC must have taken a stupid pill. The committee ordered the guys in the basement to crank up the printing presses. In 1996, the money supply started to rise very rapidly indeed.

What were the consequences of all that extra money? The US got two speculative bubbles in a row. First,there was the stock market bubble, which reached a frenzy with the fiasco. The Fed calmed things down a little in 2000, raised rates and the dot.coms bombed. Undeterred, the Fed went at it a second time. In 2001, just after 9-11, the money supply began to increase, interest rates came down, and off went the housing bubble. Today, that mess is still being cleared up.

So, two speculative bubbles in ten years; with the dollar sinking to record lows. Few central banks have such a dismal record of incompetance. The federal government did their part. Encouraged by lower interest rates, it ran up a large fiscal deficit to complement the monetary chaos over at the Fed.

So, in macroeconomic terms, where is the US right now? It has a massive current account deficit; a large fiscal deficit; rising government indebtedness; personal debt is at an all time high; the economy is slowing, while the housing market has fallen down a dark hole; and to top it all, the Fed still has the money supply growing at around 6-7 percent annually.

What is the way out of this mess? Again, it is nothing complicated. The Fed must reduce the growth of the money supply, which means higher interest rates. This will encourage private sector savings, and reduce personal sector indebtedness. Higher interest rates will also discourage the federal government from running up large deficits. This recipe may involve some upfront costs - a recession is very likely. However, continuing this macroeconomic mess will only delay a much deeper and more painful economic downturn later.

Sadly, the Fed has still not quite understood the relationship. As the chart above indicates, monetary growth is still way too fast. Although, the housing market is unwinding; the Fed have ensured that there is still plenty of inflationary pressure building up. Sooner or later, rates will have to go up again.

Here is a neat clip looking at homebuilder stocks. Too much supply, overpriced inventory, and no demand; this all adds up to a bleak future for housing stocks.

Why are mortgages so complicated? In principle, it is just a long term loan used to buy real estate. Yet, mortgage products have become so complex that no one understands them anymore.

A recent study by the Federal Trade Commission confirmed some of difficulties that people have in deciphering today's mortgage products. The commission surveyed 819 recent prime and subprime mortgage customers in 12 locations around the country. The findings of the study were disturbing:

· Nearly nine out of 10 borrowers could not identify the correct amount of upfront charges connected with a loan.

· Four out of five could not explain why the stated interest rate on the loan note was different from the annual percentage rate, or APR, highlighted in the truth-in-lending disclosure.

· Two-thirds did not identify a potentially nasty trap lurking in the loan; a substantial penalty if they refinanced within the first two years.

· Nearly a quarter could not correctly identify the total amount of settlement costs.

Mortgage companies would argue that mortgage products now cater for a diverse customer base with different financing needs. However, this argument looks rather weak in the face of these survey results. If people don't understand the products, how can they identify which loan is best for them?

Is the following report too alarmist? Perhaps not. The subprime crash is rippling out and infecting the wider financial system. The danger is that higher defaults in the subprime market will lead to a banking crisis along the lines of the savings and loan crisis in the 1980s. All the ingredients are there already; poor asset quality, exploding foreclosure rates, liquidity tightening, and regulatory failure.

(UK Telegraph) The United States faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.

The group said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs.

"Excess liquidity in the global system will be slashed," it said. "Banks' capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing."

Charles Dumas, the group's global strategist, said the failed auction of assets seized from one of the Bear Stearns funds by Merrill Lynch had revealed the dark secret of the CDO debt market. The sale had to be called off after buyers took just $200m of the $850m mix.

Abandoned by fellow banks, Bear Stearns has now put up $3.2bn of its own money to rescue one of the funds, a quarter of its capital.

Lombard Street’s warning comes as fresh data from the US National Association of Realtors shows that the glut of unsold homes reached a record of 8.9 months supply in May. Sales of existing homes slid to an annual rate of 5.99m.

The median price fell for the 10th month in a row to $223,700, down almost 14pc from its peak in April 2006. This is the steepest drop since the 1930s

It is not just the poor who are losing out from the housing crash; the rich are also taking a hit. Caliber Global Investment Ltd., a $908 million fund, will close after running up losses in the sub prime mortgage market. The fund reported an almost $9 million loss in the second-quarter. Meanwhile, another London based hedge fund - Queen's Walk Investment Ltd - stacked up a $91 million loss during the first quarter of this year. Again, most of the losses were due to rising defaults in the US sub prime market.

Thus, it would seem that investors have suddenly rediscovered that risk exists in the housing market. Between 2001-06, investors had systematically and wilfully mispriced the potential losses from the US housing bubble. Now, investors are desperately running for the exit, frantically avoiding the investment products that they purchased with abandon during the exuberant years of double digit house price inflation.

Yet, here is the great mystery of today's housing crash - risk is not a difficult thing to understand. If a financial institution gives a borrower with a poor credit history a massive loan to finance an overpriced house, then the probability of default is rather high. In principle, this increased risk should be reflected in the interest rate charged to the borrower. This simple observation seems obvious now, as default rates are rocketing. Yet somehow, this was all forgotten during the crazy hazy speculation of 2003-5.

Unfortunately, mispricing risk wasn't the only stupid thing that mortgage lenders were doing. They were also backend loading interest charges through teaser rates and complex adjustable rate mortgages. In effect, institutions pushed their problems out two years by offering inappropriate mortgages to people who didn't understand the financial products they were buying. It was as if the sub prime industry had designed a marketing strategy that would maximise the chances of a wave of defaults.

Now, losses are piling up, and default rates are undermining any prospect of a recovery in the housing market. Not that the prospects for a recovery were ever going to be particularly high. The market remains fundamentally imbalanced. With inventory rising to all-time highs, and prices falling, the correction has a long way to go yet. Nevertheless, the sub prime crash has the potential to undermine housing finance for years to come. With investment funds abandoning the sub prime market, stung by a large losses, it will take a long time before investors feel confident enough to return. As the supply of funds drying up, the number available mortgages will likewise diminish.

Today's housing market has become one massive wealth destruction machine. The poor sub prime borrowers can't afford the houses they are living in. As they default, they incur personal losses which they cannot cover. These losses end up on the balance sheets of sub prime lenders, whose investors ultimately take the hit. Everyone loses; all are to blame; all are punished.

Can the housing crash be quarantined? Will the economy keep on going as house prices decline, foreclosures explode and mortgage lenders go bust? If recent consumer confidence data is any guide, the US economy is sliding into recession.

June 26 (Bloomberg) Consumer confidence in the U.S. dropped more than forecast and two other reports signaled that demand for houses is still falling in the second year of the home-building slowdown.

The New York-based Conference Board's index of consumer confidence fell to 103.9 in June from a revised 108.5 the prior month. Purchases of new homes fell 1.6 percent last month to an annual pace of 915,000, the Commerce Department reported in Washington, and housing prices in 20 cities in April fell by the most in at least six years, according to S&P/Case-Shiller.

Dwindling property values may further erode the confidence of shoppers, whose spending kept the economy afloat for the past year. Further declines in sentiment would call into question forecasts for a pickup in economic growth by the Federal Reserve, which is likely to keep interest rates unchanged following its two-day meeting beginning tomorrow.

After years of easy money, cheap credit, and reckless monetary policy, central banks are coming to the realisation that an old ghost has returned to haunt us - inflation. The Bank of International Settlements, the organisation that acts as the central bank for central banks warned that central banks must act now and push interest rates higher. The warning was especially directed towards countries with high current-account deficits, in other words, the United States.

The BIS also provided a stark assessment of the US housing market. It said that "The impact of the downturn in the US housing market might not yet have been fully felt." The organisation was right on the money with this one. Housing data from May shows that the crisis is deepening with no end in sight.

The warning from the BIS is welcome, but it is way too late. It would be much better if it had explained the dangers of low interest rates five years ago. All over the world, central banks are now confronted with increasing inflationary pressures, and reluctantly they are beginning to push interest rates up. However, central banks continue to seek the line of least resistance. Rather than aggressively pushing up rates, central banks are doing it slowly, in a forlorn hope that they can avoid recessions.

This reluctance to deal with the problem aggressively threatens to prolong a recession rather than avoid one. It would be better if interest rates were hiked quickly, rather than this low and passive approach that we are witnessing now. People would understand that central banks across the world were serious about tackling inflation, and adjust their behaviour accordingly. Firms would avoid hiking prices, workers would moderate their wage claims, and global imbalances would adjust more quickly and with less pain.

The housing market took another battering in May. The slump in activity, which started last year, is now accelerating.

  • Home sales slumped to a four-year low.
  • From May 2006 to May 2007, sales dropped a staggering 10.3%.
  • Housing inventory is at a 15 year high.
  • The median price of a home dropped yet again, down 2.1% from May last year. It had been 11 years since home prices showed a year-over-year decline

    Will it get worse? This is only the beginning.
  • Today, Bloomberg carried a story suggesting that the losses experienced from the housing market could be "just the tip of the iceberg". Anyone who has followed the housing bubble blogs will know that this sorry reality has been known for quite some time.

    Too many adjustable mortgages, coupled with lax lending standards, and an explosion of property prices; that is hellish brew. It will lead to only one outcome; massive defaults followed by a financial crisis. This is what we see now emerging, with almost daily news stories highlighting banks in trouble and foreclosure rates going through the roof.

    June 22 (Bloomberg) -- Losses in the U.S. mortgage market may be the ``tip of the iceberg'' as borrowers fail to keep up with rising payments on billions worth of adjustable-rate loans in coming months, Bank of America Corp. analysts said.

    Homeowners with about $515 billion on adjustable-rate home loans will pay more this year, and another $680 billion worth of mortgages will reset next year, analysts led by Robert Lacoursiere wrote in a research note today. More than 70 percent of the total was granted to subprime borrowers, people with the riskiest credit records, they said.

    Surging defaults on subprime loans have pushed at least 60 mortgage companies to close or sell operations and forced Bear Stearns Cos. to offer a $3.2 billion bailout for one of two money-losing hedge funds. New foreclosures set a record in the first quarter, with subprime borrowers leading the way, the Mortgage Bankers Association reported.

    Bear Stearns, the second-biggest underwriter of mortgage bonds, offered to provide $3.2 billion of financing to rescue one of its hedge funds. Concern about the collapse of the funds, which made bad bets on securities tied to mortgages, sent bonds and stocks of finance companies lower.

    Homeowners who can't afford to pay higher interest rates may struggle to sell their properties as home price increases slow, and stricter lending standards will make it harder to refinance, the Bank of America analysts wrote today. Interest payments on about $900 billion of the riskiest subprime home loans are due to increase this year and next, they said.

    Countrywide Financial Corp. and IndyMac Bancorp Inc., two of the largest U.S. home lenders, may suffer more than other finance companies because they hold mortgages as well as selling them off to investors, the analysts wrote. The companies may not have set aside enough money to cover losses, said Bank of America, which has a ``sell'' recommendation on both lenders.

    The proportion of income that U.S. households with mortgages used for making payments in the first quarter of 2007 was close to or above the previous high in the late 1980s and early 1990s, the analysts said. U.S. mortgage borrowers will continue to find it harder to pay their debts until the end of next year, the analysts said.

    How many times have you had a conversation that started something like this: "Yes, I have just sold my home for $100,000 more than I paid for it five years ago. I made soooooo much money from my house. However, all those loser renters have missed out"

    Invariably, the house-owner has spent little time contemplating the wider cost of house ownership. However, we no longer have to go through the tedious exercise of explaining that there are such things as utilities, local taxes, and realtor commissions. All we have to do now is refer them to this site.

    the last few months, for a fleeting moment, I have occasionally re-examined the possibility of buying. After all, "prices are coming down", I say to myself and at some point, "it has to make good financial sense to buy".

    However, the question remains in my mind for about as long as it takes to put in some numbers into a mortgage calculator and wait until the computer returns with the monthly mortgage repayment. Despite recent price declines, housing ownership numbers still don't come within a mile of making it better than renting. Mortgage costs are still way out of line relative to rents. When all the other housing-related costs such as repairs, and taxes are included, owning a house looks like stupidity.

    In contrast, renting is akin to having an undated option. It allows the owner of the renter to enter the market when he is "in the money". At the moment, home ownership is a wealth minimising strategy. It is a cash flow killer. With the current misaligned and tramatized market, no sane person would seriously consider buying.

    The subprime implosion is far from over. Here we have a story about some subprime mortgage backed assets that need to be sold, but no one wants to touch. What happens next; prices adjust downward, meaning that the yield on these types of assets rise. Sooner or later, these rising yields will feed into retail mortgage costs.

    The subprime market is slip-sliding away.....

    (MSN Money) The giant market for securities backed by US subprime mortgages was thrown into turmoil on Wednesday as lenders struggled to sell more than $1bn of assets seized from two Bear Stearns hedge funds that suffered heavy losses on subprime bets.

    The complex securities being auctioned are rarely traded and early attempts to sell the collateral met with mixed results. The prospect of the "fire sale" knocked down prices for similar mortgage-backed assets and sent a key derivative index for the market to record lows.

    The rout highlights the risks investors take when they buy illiquid and hard-to-value securities. Fire sales in times of stress can trigger dramatic changes in pricing in such markets, perhaps leading other holders of assets to mark their values down and triggering demands for additional collateral from lenders.

    Kathleen Shanley, analyst at research firm Gimme Credit, said the unravelling of the Bear Stearns funds was "at best an embarrassment for Bear Stearns, and at worst it threatens to have a ripple effect on valuations across the subprime sector".

    The sales began on Tuesday and were set to continue on Wednesday. Among the assets for sale by lenders Merrill Lynch and Deutsche Bank were investments in so-called collateralised debt obligations, or CDOs, which pool securities that can include mortgage-backed bonds, corporate bonds, leveraged loans and sometimes other CDOs. Many of the CDOs the Bear Stearns funds invested in were backed by risky mortgage securities, which have suffered heavy losses and ratings downgrades in recent weeks.

    One mortgage investor said that while the CDO assets for sale carried high credit ratings, they were backed by such risky mortgages as to be "junk in investment-grade clothing".

    Merrill Lynch was set to auction $850m of such assets on Wednesday after rejecting a Bear Stearns offer to buy them directly, while Deutsche Bank was also planning to sell $350m of CDO assets seized from the funds. JPMorgan began selling seized collateral on Tuesday, but yesterday halted its sale and then made a private deal with Bear Stearns to eliminate its exposure to the fund.

    Paulson thinks that the housing correction is "at or near the bottom". That is a sure sign that the housing market has still got a long way to go before things stabilise.

    WASHINGTON (Thomson Financial) - The US housing market correction is 'at or near the bottom' but the fallout from problems in the subprime mortgage market will likely continue, Treasury Secretary Henry Paulson said. Paulson said losses related to foreclosures in the subprime market were to be expected in light of the 'major' housing correction the US has gone through. At the same time, he believes the risk in this area is 'largely contained,' and poses no threat to the overall economy.

    Today, Bloomberg provided a neat summary of the state of today's housing market.

    June 20 (Bloomberg) -- The worst is yet to come for the U.S. housing market. The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, according to the National Association of Realtors.

    Confidence among U.S. homebuilders fell in June to the lowest since February 1991, according to the National Association of Home Builders/Wells Fargo index released this week. Housing starts declined in May for the first time in four months, the Commerce Department reported yesterday. New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession.

    Goldman Sachs Group Inc., the world's biggest securities firm, and Bear Stearns Cos., the largest underwriter of mortgage-backed securities in 2006, said last week that rising foreclosures reduced their earnings. Bear Stearns said profit fell 10 percent, and Goldman reported a 1 percent gain, the smallest in three quarters. Both firms are based in New York.

    The investment banks, insurance companies, pension funds and asset-management firms that hold some of the U.S.'s $6 trillion of mortgage-backed securities have yet to suffer the full effect of subprime loans gone bad, said David Viniar, Goldman's chief financial officer. Subprime mortgages, given to people with bad or limited credit histories, account for about $800 billion of the market.

    Homebuilding stocks are down 20 percent this year after falling 20 percent in 2006, according to the Standard & Poor's Supercomposite Homebuilding Index of 16 companies. Before last year, the index had gained sixfold in five years.

    The average U.S. rate for a 30-year fixed mortgage was 6.74 percent last week, up from 6.15 percent at the beginning of May, according to Freddie Mac, the second-largest source of money for home loans. That adds $116 a month to the payment for a $300,000 loan and about $42,000 over the life of the mortgage.

    The recent increase in mortgage rates is the biggest spike since 2004. The change means buyers can afford 8 percent less house than they could five weeks ago, Kiesel said.

    In addition to their primary mortgages, homeowners had $913.7 billion of debt in home equity loans in 2005, more than double the $445.1 billion in 2001, according to a paper by former Federal Reserve Chairman Alan Greenspan and James Kennedy on equity extraction issued by the Fed three months ago.

    About a third of that money, extracted as home values surged 53 percent from 2000 to 2005, was used to buy cars and other consumer goods, according to the paper. The interest rate on those loans doubled to 8.25 percent in 2006 from 4 percent in 2003.

    Homebuyers who got an adjustable-rate mortgage, a so-called ARM, in 2004 have seen their rate climb by about 40 percent. That's enough to add $288 to the monthly payment for a $300,000 mortgage. The average adjustable rate last week was 5.75 percent, an 11-month high, according to Freddie Mac.

    A Fed survey of senior loan officers issued in April said that 45 percent of lenders had restricted ``nontraditional'' lending, such as interest-only mortgages, and 15 percent had tightened standards for the most creditworthy, or prime, borrowers. More than half had raised standards for subprime borrowers, according to the survey.

    Subprime mortgages have rates that are at least 2 or 3 percentage points above the safest so-called prime loans. Such loans made up about a fifth of all new mortgages last year, according to the Mortgage Bankers Association in Washington.

    The median U.S. price for a previously owned home fell 1.4 percent in the first quarter from a year earlier, the third consecutive decline, according to the National Association of Realtors. Before the third quarter of 2006 prices hadn't dropped since 1993. The quarterly median may dip another 2.4 percent in the current period, the Chicago-based industry trade group said in its June forecast. Measured annually, the national median hasn't dropped since the Great Depression in the 1930s, according to Lawrence Yun, an economist with the trade group.

    The share of mortgages entering foreclosure rose to 0.58 percent in the first quarter, the highest on record, from 0.54 percent in the final three months of 2006, the Mortgage Bankers Association said in a report last week. Subprime loans going into default rose to a five-year high of 2.43 percent, up from 2 percent, and late payments from borrowers with poor credit histories rose to almost 13.8 percent, the highest since 2002.

    Prime loans entering foreclosure increased to 0.25 percent, the highest in a survey that goes back to 1972. That's a sign that even the most creditworthy borrowers are being squeezed, Roubini said.

    Moody's investor services finally picked up on the reality confronting the US mortgage market; it downgraded 131 subprime mortgage investment products. It also put 237 under review.

    The downgrades will inevitably make it harder for lenders to finance subprime mortgages. It should push mortgage rates up, and put further pressure on an already deeply distressed housing market.

    To put it another way; it is just one more nail in the coffin.

    WASHINGTON (AP) -- Moody's Investors Service said Friday it downgraded 131 mortgage investments backed by loans issued to people with weak, or subprime, credit histories. More people who took out subprime mortgages, especially adjustable-rate loans issued over the past two years, have been defaulting on their monthly payments as their mortgages reset to higher rates. That, in turn, makes mortgages pooled into securities and sold to investors a riskier proposition.

    Moody's said it also put 237 securities on review for further downgrades, including 111 of those already downgraded Friday. The downgrades affects both investment-grade and below-investment grade debt, including securities that had been rated 'Aa', 'Aaa' or 'A' and below, Moody's said.

    The ratings agency's action affects mortgage securities issued by companies including Bear Stearns Cos., Merrill Lynch & Co., Credit Suisse Group, First Franklin Corp., and IndyMac Bancorp Inc.

    Moody's said the downgrades were a result of a higher-than-expected rate of defaults among second mortgages issued to subprime borrowers last year. Moody's said the loans "were originated in an environment of aggressive underwriting."

    Private house construction is definitely in recession. The housing start numbers for May were horrible. Here are the sorry details.

  • Total housing starts were at their second lowest level since 1996.
  • During the height of the bubble, the construction industry started an average of 1.96 million homes a month. During the first five months of this year, the industry started only 1.47 million homes. That represents a fall of 33 percent relative to the top of the bubble.

  • The blue line in the chart represents the trend in recent housing starts. It suggests that the housing slowdown has a lot of momentum, with little sign of recovery on the horizon.

    These are desperate days for mortgage lenders. Interest rates are up, foreclosures are skyrocketing and losses are mounting. Overall, it is a difficult environment to generate more businss.

    Therefore, it shouldn't be too surprising if we hear that mortgage brokers pushing out scare stories about failing lenders. In this particular story, GMAC are caught putting out a letter warning people about the financial frailties of their rival - Washington Mutual.

    For mortgage brokers, it is always about the commission. If borrowers stop refinancing, brokers stop earning. With rates rising rapidly, things do look rather bleak. Therefore, scare tactics such as these are the last resort of an industry in free fall.

    However, few of us will be outraged. It is what we have come to expect from the American housing industry.

    NEW YORK (Fortune) -- During the height of the real estate bubble, mortgage lenders were often shameless in how they pursued new business. Whether it was jacking up hidden closing costs to make loans appear cheaper than they were or using absurdly-low teaser rates on option- or interest-only ARMs to get customers in the door, lenders made owning a home seem easy.

    Too easy. Fast forward a couple years, and mortgage defaults are skyrocketing. Foreclosures were up 90 percent in May alone, according to RealtyTrac. And lenders are finally realizing that coaxing consumers to borrow more than they can really afford is, as business strategies go, just plain dumb.

    What's a mortgage marketing maven to do? Well, bereft of their teaser rates, the marketing whizzes of at least one major lender apparently decided that scare tactics are the way to go.

    Just consider the direct-mail solicitation I recently received from GMAC Mortgage. The letter was addressed to me as a "Washington Mutual Customer"- I have a 30-year, fixed-rate mortgage with WaMu - and it began ominously: "You've probably read about it in the newspaper or seen it on the nightly television news. Many mortgage lenders all across the country are heading for financial trouble because they have made too many questionable loans. Some lenders may even go out of business. And what will become of the people who trusted those lenders if that happens?"

    Then came the kicker: "Allow us to help you refinance your mortgage with the rate and term that best suits your needs."

    GMAC's pitch is absurd on so many levels I barely know where to begin. First off, the letter implies if you have a conforming mortgage, as I do, that you could somehow lose your mortgage should your lender go bankrupt. That's simply untrue. Sure, there could be some servicing glitches should your loan be acquired by another bank, but that's more an annoyance than a genuine financial safety issue.

    US homebuilder confidence is at a 16 year low. The industry isn't short of misery; rising inventory, falling sales, rising defaults, falling profitability, rising interest rates, and falling prices. Who could hold a happy face after that litany of problems?

    June 18 (Bloomberg) -- Confidence among U.S. homebuilders fell this month to the lowest since February 1991 as interest rates climbed and delinquencies surged. The National Association of Home Builders/Wells Fargo index of sentiment declined to 28 this month from 30 in May, the Washington-based association said today. Readings below 50 mean most respondents view conditions as poor. Economists surveyed by Bloomberg News forecast the gauge to stay unchanged this month.

    Homebuilders including Hovnanian Enterprises Inc. are losing money as they cut prices to stem a slide in sales amid stricter standards for getting mortgages. Builders have scaled back projects to work off bloated inventories, a sign housing construction will weigh on growth for the rest of the year, economists say.

    The median forecast of 35 economists surveyed by Bloomberg was for the index to stay at 30. Predictions ranged from 28 to 32. The group's measure of single-family home sales fell to 29 from 31. The index of traffic of prospective buyers slipped to 21 from 22. A gauge of sales expectations for the next six months declined to 39 from 41.

    Federal Reserve policy makers last month acknowledged that the housing recession will hold down growth longer than they had anticipated. At the same time, officials have kept their outlook for ``moderate'' growth in the overall economy as consumer spending gains and manufacturing accelerates.

    Some reports in recent weeks pointed to reviving demand for homes. The Mortgage Bankers Association's index of applications for mortgages to purchase homes rose an average 5 percent in May from the prior month and was up 6 percent from a year ago. Purchases of new homes unexpectedly jumped in April by the most in 14 years from April, the government reported last month.

    Still, a large stock of unsold homes means that builders are reducing their projects. Inventories in April equaled 6.5 months' worth of sales, down from a record high of 8.1 months' worth in March.

    Building permits, which signal intentions of starting projects, fell in April to the lowest since June 1997. The Commerce Department may say tomorrow that housing starts fell last month to an annual rate of 1.473 million, from 1.528 million in April, according to the median forecast. The housing market also must deal with the burdens of rising mortgage rates and tighter lending standards.

    Thirty-year mortgage rates at the end of May averaged 6.37 percent, rising further to an average 6.74 percent at the end of last week, according to Freddie Mac, the second-largest purchaser of U.S. mortgages.

    The number of U.S. homeowners who face possible eviction because of late mortgage payments rose to an all-time high in the first quarter, led by subprime borrowers, the Mortgage Bankers Association said in a report last week. U.S. foreclosure filings surged 90 percent in May from a year ago, RealtyTrac Inc., which monitors foreclosures, said June 12. The failure of at least 50 subprime lenders, who make loans to consumers with poor or limited credit history, raised concern homes will be thrown back on the market as foreclosures rise.

    This is my favorite fact about the bubble: the average price increase on the first day of trading of an IPO money waster was more than 70 percent. That is right; in just one day, the pump-and-dump practices of Wall Street returned a cool 70 percent return. What was the comparable one day return of an IPO between 1981-1996? It was about 8 percent. That fact alone should be sufficient to convince everyone that Wall Street was up to something very unpleasant.

    Today, the Supreme court dealt a serious blow to those investers who wanted to hold investment banks accountable for their anti-competitive practices. Here are the sorry details of justice denied.

    A sad day.......

    WASHINGTON - The Supreme Court on Monday dealt a setback to investors suing over their losses in the crash of technology stocks seven years ago. In a 7-1 decision, the court sided with Wall Street banks that allegedly conspired to drive up prices on 900 newly issued stocks.
    The justices reversed a federal appeals court decision that would have enabled investors to pursue their case for anticompetitive practices. The case deals with alleged industry misconduct during the dot-com bubble of the late 1990s. The outcome of the antitrust case was vital to Wall Street because damages in antitrust cases are tripled, in contrast to penalties under the securities laws.

    The question was whether conduct that is the focus of extensive federal regulation under securities laws is immune from liability under federal antitrust laws. An antitrust action raises "a substantial risk of injury to the securities market," Justice Stephen Breyer wrote. He said there is "a serious conflict" between applying antitrust law to the case and proper enforcement of the securities law.

    In dissent, Justice Clarence Thomas said the securities laws contain language that preserves the right to bring the kind of lawsuit investors filed against the Wall Street investment banks. In 2005, the 2nd U.S. Circuit Court of Appeals said the conduct alleged in the case is a means of "dangerous manipulation" and that there is no indication Congress contemplated repealing the antitrust laws to protect it.

    Investors allege that the investment banks, including Credit Suisse Securities (USA) LLC, agreed to impose illegal tie-ins, or "laddering" arrangements. Favored customers were able to obtain highly sought-after new stock issues in exchange for promises to make subsequent purchases at escalating prices. The investment banks allegedly conspired to levy additional charges for the stock.

    As a result of the conspiracy, the investors say, the average price increase on the first day of trading was more than 70 percent in 1999-2000, 8 1/2 times the level from 1981 to 1996.
    Private class-action lawsuits, say plaintiffs' attorneys, provide a significant supplement to the limited resources available to the Justice Department to enforce the antitrust laws.

    Lawyers for Wall Street investment banks say it is a highly technical matter where the line is drawn between legal and illegal activity in the sale of newly issued stock. It must be left to highly trained securities regulators to decide, rather than to courtroom juries in antitrust lawsuits brought by investors, the industry says.

    The Supreme Court concluded that "antitrust courts are likely to make unusually serious mistakes" that hurt defendants. As a result, investment banks must avoid "a wide range of joint conduct that the securities law permits or encourages."

    From liar loans to FICO scores, the housing market is riddled with dishonesty. Things are so bad that you begin to sorry for the poor hapless mortgage brokers out there. Is there anyone out there that they can trust?

    Here is one scam that needs to be stopped quickly. People with poor credit can boost their credit scores by linking up with people with good credit histories. The trick is quite straightforward; people with good credit histories attach people with poor credit histories onto their credit cards. Furthermore, the Internet is there, ready to match up the credit cripples with the people with beautiful FICO scores.

    The scam has some interesting implications for the current foreclosure crisis. Suppose that a large number of low interest mortgages were extended to people who should have received high interest subprime loans on account of the poor credit history. Superficially, this might mean that these pseudo-high quality borrowers have a lower probability of default, since the interest on their loans is lower than it otherwise would have been.

    However, it is more likely that these irredeemably irresponsible borrowers maxed out on their credit limits. They probably took out larger loans in the otherwise could have, leaving them just as vulnerable to default, regardless of their fake credit scores.

    Will this have an impact on the fast imploding housing market? It comes down to a question of how many subprime borrowers infiltrated the quality mortgage market. One thing is for sure: mortgage brokers were not asking too many searching questions about default risk. Perhaps, we shouldn't feel so sorry for them after all.

    (Washington Post, June 16) The days may be numbered for dozens of Internet-based companies that promise to quickly boost FICO credit scores by 200 to 300 points. Fair Isaac, the developer of the widely used FICO score, plans to introduce key changes designed to derail schemes that transplant high-quality credit card histories to the files of people with low FICO scores.

    The credit-boost companies, easily found on the Web by searching for "credit trade line," claim that they violate no federal laws and are not seeking to defraud mortgage lenders. But mortgage industry groups, federal and state regulators, and credit industry leaders say the programs represent significant threats to the home lending system -- opening the door to fraudulent home loan applications.

    Using a FICO-boost service, for example, a mortgage applicant with a history of late and missed payments and a FICO score in the 500s could puff up his or her score well above 700 and be eligible for the best interest rates and fees.

    How could that happen? Check out the online pitch of one promoter: "Rent your credit and earn thousands," it proclaims. The company offers cardholders with sterling payment histories on cards with high balances "as much as $10,000 a month or more" simply by accepting unseen borrowers with poor credit backgrounds as "authorized users" on their card accounts for 90 days.

    Although the add-on users receive no access to the credit card and cannot rack up charges, Fair Isaac's FICO model allows the cardholders' excellent payment histories to flow directly into the credit files of all authorized users on the card. The addition of the high-quality credit quickly raises the scores of any authorized users -- even though the add-on users may still be poor credit risks.

    These are desperate times for condo developers in Washington DC, and desperate times require desperate measures. This article in the Washington Post highlighted one particularly sad and desperate attempt to roll in some potential buyers. However, it is doubtful if lavish parties will save the DC property market.

    Condo sales numbers in the nation's capital are catastrophic. Currently, property developers are selling around 1,600 condos a quarter. During 2005, developers were shifting around 3,000 units a quarter. Think about those numbers for a moment. Imagine if the sales volumes in your business fell by almost half.

    Looking forward, the DC market will be saturated with unsold condominiums. Currently, there are about 21,000 under construction, and another 20,000 are slated to construction in the next three years.

    Taken together, property developers need to shift 41,000 units while current sales are standing at 1600 units. Given current sales volumes, it will take over six years for the excess inventory to clear. If parties are what it takes to shift condos, then it is party time in the nation's capital.

    (Washington Post) The valet parking attendants were at the ready as the SUVs and BMWs pulled up. Men in suits and women in cocktail dresses walked through a white tent into a lobby where bartenders poured Bellinis, Kir royals and orange sorbet mimosas. Waiters passed trays of shrimp, ahi tuna on toast points and cucumber slices with crabmeat.

    There was even a paparazzo in the form of Darren Santos. Posing for him in the tent was YouthAIDS founder Kate Roberts, fresh from a trip to India with a delegation that included actress Ashley Judd. "Glamorous and photogenic," Santos gushed.

    It was one of the glitziest social events of the week, drawing about 200 people on a Wednesday night. But it wasn't an embassy party or a charity event or a political fundraiser. This was the preview party for the Grant, a new condominium on Massachusetts Avenue NW.

    Some of the hottest D.C. parties this spring and summer have combined two of Washington's biggest obsessions: real estate and networking. With the condo market still in a slump, developers are throwing lavish affairs to create buzz for their projects, turning to a marketing technique more common in Miami and New York.

    "We're in Washington. People love their events and their black tie and their kind of sassy parties," said Tracy Danneberg, special events coordinator for Metropolis Development, builder of the 90-unit Metropole near Logan Circle. "You have to keep up with it and be different."

    Here's why: In the first quarter of 2007, developers sold 1,629 new condos, down from the more than 3,000 they sold each quarter of 2005, according to Gregory H. Leisch, chief executive of the Alexandria real estate research firm Delta Associates. Meanwhile, in the first quarter of 2007, there were 21,523 units under construction or being marketed, and another 20,469 units are planned over the next three years, Leisch said.

    Hence the parties, some of them lavish affairs with price tags of more than $50,000, others intimate Sunday champagne brunches. There are groundbreaking parties, preview parties, grand opening parties.

    A few weeks ago, Robert Kiyosaki wrote an extraordinarily stupid article entitled "Playing the Mutual Fund Lottery". Kiyosaki tried to argue that buying mutual funds was akin to playing the lottery. Recently, the hapless son of rich dad disowned the article; now he claims that it was a joke written by a friend. Regrettably, the rest of the world lacked his subtle sense of humour, and couldn't pick up on his joke.

    However, his most recent article shows an almost equal lack of understanding about the world of finance. This week, he tells us about another financial piece of wisdom, passed on to him by his mythical rich dad - the investor food chain. At the top of this chain we find the capitalists, followed by the bankers, then the bondholders, stockholders and mutual funds, with the workers sitting at the bottom. It is a perspective that Lenin and Marx would have endorsed; happy rich guy at the top, miserable worker at the bottom. The key question Kiyosaki poses is "where on the food chain are you?".

    Kiyosaki uses this dubious line of thinking to argue against mutual funds. He points out that "mutual fund investors are just above the bottom" and therefore inferior to banks and bondholders. In his uniquely clueless and incoherent way, Kiyosaki seems to be telling his readers that if they can't be capitalists, they shouldn't invest in equity but should choose fixed-income instead. He talks of the "power of debt in contrast to equity" and that "debt holds a higher position than equity, and bankers and bondholders are in debt positions. Preferred stocks, stocks, and mutual funds are in equity positions". Hopefully, most investors, even the amateur ones that Kiyosaki so contemptuously derides, know the difference between equity and debt.

    If only it were as easy as Kiyosaki suggests. The problem, however, is that the returns of fixed-income assets haven't been that impressive in the last five or so years. Certainly, the risks associated with fixed-income assets have been low, but returns have barely kept up with inflation. Until comparatively recently, equity hasn't done much better. Meanwhile some mutual funds have done well, while others have done badly.

    I love reading Kiyosaki's articles. His advice is so painful and so self-evident that it is hilarious Obviously, he understands real estate investing when housing prices are in the midst of a bubble. He runs into serious problems when the bubble bursts, and it's obvious to the whole world that real estate investing is a certain money loser. The housing crash has forced him to write about the more complex and wider world of investing. However, his lack of understanding is cruelly exposed. What he knows, everybody knows, and it is hardly worth saying. Keep reading his column, you will learn nothing useful about investing, but it will give you a unique insight into how the amateur property developer reconciles himself to a world of crashing real estate prices.

    What were US financial regulators doing when the subprime market was spinning out of control? Answer: sweet FA, nothing; they were sitting in their offices drinking coffee and waiting for the monthly paycheck.

    Once the subprime market began to crash, what does the Fed do? Why, it does what bureaucrats do when confronted with a crisis; it writes a report. Nevertheless, the report does contain some useful information. For example, no one has been censured for violating fair lending laws; half of all foreclosures are subprime borrowers; and minorities are invariably the victims.

    (Bloomberg) -- The U.S. agencies that supervise more than 8,000 banks haven't censured any of them for violating fair-lending laws, three years after Federal Reserve researchers began assembling data showing blacks and Hispanics are more likely than whites to be saddled with high-priced home loans.

    Minorities stand to be hardest hit by rising delinquencies and foreclosures in subprime loans. While Census Bureau data show that homeownership rates rose to records among blacks in 2004 and among Hispanics in 2005, they still trail whites by 25 percentage points, and the gap may widen in the current bust.

    "Black people and Hispanics have been targeted,'' said Alphonso Jackson, secretary of Housing and Urban Development, whose department is hiring to expand its own probe of discriminatory lending.

    Subprime loans -- those made at higher interest rates to people whom banks consider risky or who have sketchy credit histories -- accounted for more than half of the home foreclosures in the fourth quarter of last year. The Fed's review, conducted by economists from its research and statistics division, covered lending data from 2004 and 2005, the first two years of expanded disclosure requirements for banks and the final two years of Alan Greenspan's tenure as chairman.

    Fed researchers singled out 470 lenders for closer scrutiny over two years, with some lenders showing up in both 2004 and 2005. The Fed has turned the names over to the relevant regulators and other authorities, including in some cases state officials.

    The supervision of America's 8,650 banks is split among five agencies: the Fed, the Office of Comptroller of the Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corp. and the National Credit Union Administration. Each has the power to uphold fair-lending laws and to punish offenders.

    None of the five national regulators has published an enforcement action based on the data, according to agency spokespeople. Some lenders have been referred to the Justice Department for possible action, and investigations are continuing.

    Consumer groups say minority neighborhoods may be intentionally marketed for high-cost loans by non-bank lenders, while poor financial literacy among low-income borrowers may lead to wrong choices. A legacy of discrimination that has kept minorities from owning assets, building wealth and improving credit history may also put them at a disadvantage when loans are priced.

    FDIC Chairman Sheila Bair said she is troubled by the data and may act on two cases. "I don't believe, and I don't know that I have ever heard my colleagues say, that these disparities -- and they are significant -- can all be explained away through risk-based pricing,'' Bair said in an interview in Washington.

    Consumer advocates using the Fed figures in their own research assert they do find evidence of discrimination. The Center for Responsible Lending in Durham, North Carolina, last year took the same mortgages analyzed by the Fed and matched them with its own proprietary information. The new data subset, of 177,487 subprime loans made in 2004, included credit scores, loan-to-value ratios and property locations.

    The model concluded that African-American and Latino borrowers were more likely to receive higher-rate loans than white borrowers with similar risk. The mortgage industry disputes the center's conclusions. ``We have some real questions about the accuracy of that study,'' said Douglas Duncan, chief economist at the Mortgage Bankers Association in Washington. He called the loan match-ups a ``crude approximation.''

    Kevin Petrasic, a spokesman for the Office of Thrift Supervision, said no violations were found in the 20 lenders under his agency's jurisdiction that showed disparities along ethnic lines in 2004. The National Credit Union Administration fined some institutions for filing their loan reports late, according to spokesman Justin Grove.

    The Fed itself conducted a fair-lending review of several of the 35 lenders it supervises that it had flagged for 2004, according to spokeswoman Susan Stawick. Of the 45 institutions that surfaced in 2005, examiners did ``a full risk assessment for pricing discrimination on each,'' she added. The central bank is now studying figures for 2006.

    The Justice Department's 2006 fair-lending report shows that one Fed referral on red-lining -- where a lender refuses to write mortgages in certain neighborhoods -- remained under investigation. Stawick said the central bank referred a discrimination case this year.

    How the mighty have fallen; Goldman Sachs is hurting over the subprime crash. Its fixed income division took a beating over stupid investments in the US housing market. The bank should have stuck to doing business with its wealthier clients, who in constrast to subprime borrowers, tend to pay back their loans.

    (UK Telegraph) Goldman Sachs and Bear Stearns highlighted the problems in the US sub-prime mortgage market as both brokerages suffered large declines in their fixed-income trading businesses.

    Goldman Sachs reported a 24pc drop in its fixed income division, limiting overall second-quarter profits to a 1pc rise to $2.33bn (£1.18bn). Although the figure beat Wall Street expectations, Goldman Sachs has become used to blowing forecasts out of the water and failed to beat the record numbers of the first quarter.

    The dip reflected "continued weakness in the sub-prime sector", the company said, as well as tough comparisons from last year when it sold some of its electricity assets.

    This is a sad story, so to speak. Americans are more miserable than Europeans. We might have larger wage checks, but Europeans have more vacations and more friends. So it is better to be a socially successful lazy bum, than a lonely workaholic. I could believe that.

    What America needs is a comprehensive social security safety net like the ones they have in Europe. We need large unemployment benefits, a free public health care system and generous pensions. Then on Monday, I could pack in my job, and hang out with my buddies all day long.

    (Reuters Life!) - Americans are less happy today than they were 30 years ago thanks to longer working hours and a deterioration in the quality of their relationships with friends and neighbors, according to an Italian study.

    Researchers presenting their work at a conference on "policies for happiness" at Italy's Siena University honed in on two major forces that boost happiness-- higher income and better social relationships -- and put a dollar value on them.

    Based on that, they concluded a person with no friends or social relations with neighbors would have to earn $320,000 more each year than someone who did to enjoy the same level of happiness.

    And while the average American paycheck had risen over the past 30 years, its happiness-boosting benefits were more than offset by a drop in the quality of relationships over the period.

    "The main cause is a decline in the so-called social capital -- increased loneliness, increased perception of others as untrustworthy and unfair," said Stefano Bartolini, one of the authors of the study.

    "Social contacts have worsened, people have less and less relationships among neighbors, relatives and friends." He and two other Italian researchers looked at data from 1975 to 2004 collected by the annual General Social Surveys that monitors change in U.S. society through interviews with thousands of Americans.

    By contrast, it appeared that based on the limited data available the happiness trend had remained largely stable in Europe, which had apparently avoided some of the changes in the American workplace like longer hours and more pressure.

    "The increase in hours worked by Americans over the last 30 years has heavily affected their happiness because people who are more absorbed by work have less time and energy for relationships," said Bartolini.

    "Another important cause is that American society in the last 30 years has experienced a huge increase in competitive pressure compared to Europe. It's easier in the United States, if you belong to the middle class, to become poor than you would in Europe. This creates a state of insecurity."

    It isn't often that the Washington Post produces an alarmist article on the Housing Market. Over the last couple of years, the newspaper has earned the reputation for being the trade journal for the regions realtors. However, this story on the foreclosure rate certainly won't please many of their real estate advertisers.

    According to the post, the foreclosure rate is running at historically high levels "The percentage of US mortgages entering foreclosure in the first three months of the year was the highest in more than 50 years." This is shocking stuff

    The post also provided a nice graphic illustrating the key foreclosure numbers. And indeed, those foreclosure rates do little rather high.

    If you find yourself squinting at the graphic, click on it and it will expand in another internet explorer window.

    Consumer prices climbed 0.7 percent, the biggest increase since September 2005, led by a jump in gasoline costs. They were up 2.7 percent from the same time last year. These are bad numbers.

    However, the Fed aren't looking at the CPI. Those bozos are looking at "core inflation", which excludes food and energy. These numbers show only a 0.1 percent rise in prices.

    Lets get our concepts clear here; what is core inflation? It is a useless irrelevant measure that excludes all the prices that matter to ordinary Americans. It is con, a scam, a nonsense and a joke. Pay no attention to it. It tells us nothing about inflation. Do you know anyone who doesn't eat or doesn't need fuel?

    Core inflation is a distraction. Rather than focus on the real issue, i.e. rising prices, the Fed tracks this meaningless index. The Fed would like us to believe that gasoline and food price increases are something that simply happen by accident and that it has nothing to do with them. Let us remind ourselves how the Fed's monetary policy directly causes the prices of these key items to increase.

  • The Fed maintained a policy of low interest rates far too long.
  • Moreover, interest rates continue to be too low
  • Consumers are still borrowing too much, consumption continues to grow quickly.
  • This increased demand pushes prices up for key consumer items, like food and gasoline.
  • These prices will only stop growing when consumers stop borrowing and reduce demand.
  • This will only happen when interest rates rise again.

  • So, the lesson is simple; the Fed must raise rates and keep on raising them until they regain control of inflation.

    However, that is unlikely to happen because Bernanke is soft on inflation. He is weak.

    How soon before we have 7 percent mortgage rates. Currently, the 30 year fixed is at 6.74 percent. Not long.....

    CHICAGO (MarketWatch) -- U.S. mortgage rates jumped this week as a sell-off in the Treasury market pushed benchmark interest rates up sharply. Freddie Mac in its weekly survey Thursday said the national average on the 30-year fixed-rate mortgage hit 6.74%, up from 6.53% a week ago and the highest level since July 2006.

    "Mortgage rates moved sharply upward this week, with rates on 30-year fixed-rate mortgages jumping more than 20 basis points, the largest upward movement in over three years," said Frank Nothaft, "These moves parallel rising yields on Treasury securities, as concerns about inflation pressures and continuing strength of consumer and business spending have dimmed hopes for an interest rate cut," he said.

    Three other loans tracked in the Freddie Mac survey also hit 11-month highs. The 15-year fixed-rate loan, a popular refinancing choice, hit 6.43%, up from 6.22%, its highest level in 11 months. A year ago the 15-year averaged 6.25%.

    Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 6.37% versus 6.24% a week ago. A year ago the loan averaged 6.23%. One-year Treasury-indexed ARMs averaged 5.75%, up from 5.65% and above its year-ago level of 5.66%.

    The two fixed-rate loans required the payment of an average 0.4 point to achieve the interest rate; the hybrid needed 0.5 point and the ARM 0.7 point. A point is 1% of the loan amount, charged as prepaid interest.

    The spike in mortgage rates comes at a bad time for the housing industry, as home builders struggle with excess inventory and sales of existing homes slump. Home prices are also falling in many markets. And the Mortgage Bankers Association Thursday said new foreclosures hit a record in the first quarter.


    How soon before we have 7 percent mortgage rates. Currently, the 30 year fixed is at

    CHICAGO (MarketWatch) -- U.S. mortgage rates jumped this week as a sell-off in the Treasury market pushed benchmark interest rates up sharply. Freddie Mac in its weekly survey Thursday said the national average on the 30-year fixed-rate mortgage hit 6.74%, up from 6.53% a week ago and the highest level since July 2006.

    "Mortgage rates moved sharply upward this week, with rates on 30-year fixed-rate mortgages jumping more than 20 basis points, the largest upward movement in over three years," said Frank Nothaft, "These moves parallel rising yields on Treasury securities, as concerns about inflation pressures and continuing strength of consumer and business spending have dimmed hopes for an interest rate cut," he said.
    Three other loans tracked in the Freddie Mac survey also hit 11-month highs. The 15-year fixed-rate loan, a popular refinancing choice, hit 6.43%, up from 6.22%, its highest level in 11 months. A year ago the 15-year averaged 6.25%.

    Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 6.37% versus 6.24% a week ago. A year ago the loan averaged 6.23%. One-year Treasury-indexed ARMs averaged 5.75%, up from 5.65% and above its year-ago level of 5.66%.

    The two fixed-rate loans required the payment of an average 0.4 point to achieve the interest rate; the hybrid needed 0.5 point and the ARM 0.7 point. A point is 1% of the loan amount, charged as prepaid interest.

    The spike in mortgage rates comes at a bad time for the housing industry, as home builders struggle with excess inventory and sales of existing homes slump. Home prices are also falling in many markets. And the Mortgage Bankers Association Thursday said new foreclosures hit a record in the first quarter.

    Does anyone out there still think that interest rates are coming down anytime soon. Forget it, inflation is still running around out there. The latest bad news came from wholesale prices, which screamed ahead in May. The monthly increase was 0.9 percent. That is almost a full percentage point increase in just one month. A few more months like May, and the US will have something like double digit inflation.

    Bernanke and the gang must have needed a toilet break when they heard about these numbers. To put it mildly, the Fed must have a few concerns about continuing inflation risks. The question is whether they have the backbone to put in anothe rate rate. The economy certainly needs one.

    The bond market knows what to do, even if the Fed has lost the plot. The data sent US government bond yields back up to near five-year highs. The benchmark US Treasury 10-year bond yield rose to 5.23% after the US report was released, continuing their recent upward trend.