Economic Despair

There is a reason why financial markets are regulated. Society needs protection from unscrupulous lenders who will mislead and defraud vulnerable borrowers. However, it is strange how such simple truths can be forgotten, and then suddenly remembered when it is too late.

The subprime crisis is such an example. We have known since the beginning of time that poor folks don't make great borrowers. So, it is prudent to ensure that lenders keep away from such people. The poor tend to default on their loans, and defaults tends to create financial problems for banks.

However, the mortgage broker enters the scene. The broker feels no responsibility to either the bank or the client. He is only interested in commissions, which can only be maximised by loan originations. Without any responsibility, the broker sells loans to those who cannot pay them back. Moreover, he develops a series of unscrupulous sales techniques that lures the unwary borrower into a financial hell on earth.

Here is the story of one devious mortgage broker from the AOL real estate website.

A Mortgage Broker Reveals the Tricks of the Trade

AOL Real Estate

"There's an old saying in the mortgage broker business: The biggest liar gets the deal," says one home loan broker who has been in the business for more than 15 years. We'll call him Victor to protect his identity.

"When I price my loans, I price at the point where my buyer can't get a better loan anywhere else. That's how I sleep at night. But the other rule is to get as much from the borrower as they can before they notice. Most agents do the latter," says Victor.

It's hard to ignore the news lately about sub-prime mortgages, predatory lending and the surge in foreclosure rates. Making sense of how this debacle happened is another story. We want to find out how you can avoid common mistakes when seeking a loan. So we decided to have a very candid discussion with Victor, who's an industry veteran based in California. In his nearly two decades of lending, he has never seen anything quite like today's landscape.

A Loan with Just One Hitch

One of the most disturbing loan trends he talks about became very popular between 2001 and 2005. It's called a negative amortization loan. This is when a borrower can't afford a high interest rate because the monthly payments are too high. To close the deal, the loan agent comes up with a monthly payment and interest rate that satisfies both the borrower and the lender.

"They give the borrower a lower monthly payment based on a 1 percent or 2 percent annual interest rate, but the rate on the actual overall loan is much higher," says Victor. "So let's say the real rate is 7.5 percent, but their monthly payment is based on a 2 percent annual rate. The 5.5 percent interest they are not paying each month goes onto their balance, which means the total loan amount keeps getting bigger. So in a short amount of time, you're upside down." You can easily see why this leads to trouble. If the price of your house is not going up, but your mortgage balance is rising … it's a matter of time before you owe more on the house than it's worth. That is, unless you refinance or take on a higher monthly payment.

Victor says a lot of loan brokers, "prey on the ignorance of the consumer. The consumer is like, 'Oh gosh, I'm getting a 1 percent or 2 percent loan.' They don't understand there are no free lunches. Every month, they are losing equity. These loans have been around since the early '80s, but it wasn't until recently that the loan values were 95 percent of a home's value, compared to tougher standards like 80 percent loan to value"

With every data release, recession is creeping closer. Today, the commerce department released March consumer spending data. Purchases gained just 0.3 percent from the prior month, less than half the 0.7 percent increase in incomes. The US consumer is at last beginning to realise that it has to stop spending, and start saving.

Southern California is a foreclosure disaster zone. During the first three months of this year, there were 5,977 foreclosed homes; up from 711 in the same period last year, according to research firm DataQuick Information Systems.

It was as certain as day follows night. Investors start to lose mony on subprime-backed investment bonds. Then the lawyers turn up. It will soon be bubbletime for law suits, as investors try to shift the blame onto the investment backs. Credit Suisse are the first bank to suffer the legal wrath of angry investors. However, they won't be the last.

You can just imagine the shock when investors woke up to the subprime collapse. "What, you didn't tell us that we could lose money on real estate". Yes, you can lose on real estate. That is the great lesson of 2007.

Let's repeat that; Yes, you can lose money on real estate.

April 27 (Bloomberg) -- Credit Suisse Group was sued by a Florida insurer that says it lost money on investment-grade bonds backed by subprime mortgages sold by the bank.

The suit, filed in Florida by Bankers Life Insurance Co., is ``one of three to five in the pipeline'' involving securitizations by Credit Suisse, Switzerland's second-largest bank, said Dale Ledbetter of Ledbetter & Associates P.A., one of two law firms representing the Bankers Financial Corp. unit.

"We suspect that once people understand what occurred here, there's going to be a lot more," Ledbetter said. A total of $302.6 million of bonds were originally issued in the deal.

Bankers Life, based in St. Petersburg, is seeking to recover about $1.3 million to make up for losses of principal, interest and market value on about $1.4 million of the 2001 bonds it bought in 2004, Ledbetter said. Other investors considering suits will probably seek between $500,000 and $3 million each, he said.

Chicago has become just another blownout bubbletown. City real estate developers sold 5,341 homes in last quarter; down 35 percent from a year earlier. Moreover, it is the weakest showing in more than 11 years. That is the latest findings from the real estate consulting firm Tracy Cross & Associates Inc.

Slow sales and rising inventory are gradually pushing prices down. The median sale price for single-family homes fell 1.7% to $299,470. However, the city center is awash with empty condos, with more coming onto the market every month. Prices have to fall much further before supply moves into line with demand.

The homebuilding sector is slipping into recession. Contractors and developers have slashed payrolls and stopped building houses on "spec". The Dallas-based Centex Corp., which sold 1,150 homes in the Chicago area last year, has cut its workforce in half.

Rising inventory, collapsing home sales, falling prices, and rising construction unemployment; the bubble is definitely over in Chicago.

The Casey Serin real estate saga is over. The last of his eight houses has been foreclosed. He is now officially out of the real estate business. However, Casey seems to attract problems like honey gathers flies. According to his most recent blog post, he has three recent addditions:

• His auto insurance was canceled due to non-payment.
• He owes 2 months of rent and utilities.
• He had his car trashed by some thieves, who took his car stereo.

Casey intends to take a well earned break from real estate and blogging. However, he remains the eternal optimist. As he puts it “there are many good opportunities on the horizon, including a possible job, but nothing is certain right now”.

Indeed, “nothing is certain”. This is why we all need to be careful when taking on debt. It took Casey just a few short months to accumulate a lifetime of debt. He will be dealing with consequences of the housing bubble for many years to come.

Here is a youtube clip where casey explains how he got into such a financial mess. The ethical aspect of Casey's behavior is already fully discussed on this website. All I want to say is that Casey has little understanding of net worth, interest rates or risk assessment. For Casey, money is a matter of cash flow; money comes in and money goes out. There is one particularly interesting moment in this video clip. Casey has just explained how he has made $30,000 on a quick flip. Someone asks him about taxes. Judging from Casey's reply, it is fairly obvious that he hasn't thought about it.

So, Casey has come and gone, and we don't need to think about him or his sorry plight anymore. Nevertheless, Casey does leave us with at least one disturbing question. How many other Casey-real-estate-investors are there out there, making the same dumb mistakes that he did? Let us hope that Casey was a one-off.

Today, the Commerce department provided more evidence of a housing market saturated with over supply. Today’s data focused on the rental market and the number of empty houses.

• The vacancy rate for owner-occupied homes stands at a record 2.8 percent. A year ago, the vacancy rate was 2.1 percent.

• One rental home in ten is currently vacant, looking for tenants.

• Of 127.3 million housing units in the United States, 17.6 million were vacant at the end of the quarter, including 2.2 million vacant units that were for sale and 4 million for rent.

• Compared with a year ago, the housing stock increased by 1.9 million, with vacant units rising by 1.5 million and occupied units rising by 400,000.

In total, there are over 6.2 million homes either for sale or for rent. Moreover, existing home sales fell by a record 8.7 percent this month. Time to phone up the landlord. It is a good time to negotiate a lower rent.

The US economy is inching towards outright recession. In the first three months of 2007, growth slowed to 1.3 percent; the worst performance in four years. There are no prizes for guessing why the economy is sliding into the mud; the housing market. Just as rising house prices propelled the economy in 2005 and 2006, the lower prices are taking the economy down. Homeowners are cutting back on those discretionary expenditures that they previously financed with home equity loans.

Slower growth normally calls for an interest rate cut. However, the Fed is stuck in a hole. Inflation remains stubbornly high. In the first three months of 2007, core inflation jumped 2.2 percent, up from 1.8 percent in the fourth quarter of last year. A premature interest rate cut might make Ben Bernanke look soft on inflation. For central bankers, credibility is everything. So what is it going to be Ben? Higher inflation or recession?

Check out this excellent series of articles from the Denver Post on the foreclosure catastrophe in Denver. Fraud, lax lending standards, and predatory mortgage lenders play are large part in the story. All horribly familar themes.......

Forget about calling a bottom, this housing crash has only just begun. In terms of data, this was a bad week, but brace yourself, worse is to come.

Today it was the turn of the S&P/Case- Shiller home-price index to ring out the sorry news. The index showed that declines in home prices in 20 U.S. metropolitan areas had in fact accelerated in the 12 months ended in February. Values fell 1 percent from February 2006 after dropping 0.1 percent in the year ended January.

What are things getting worse. Think FIP - Foreclosures, Inventory, Prices. Foreclosures are up, Inventory is at all time highs, and prices are not adjusting fast enough to clear the market. The FIP factor explains why existing home sales fell 8.4 percent last month; the highest fall since 1989.

Foreclosures are a growth industry in California. Statewide, repossessions increased 68 percent compared to the end of last year. The foreclosure rate is now twice as high as the same period last year. There is now one foreclosure filing for every 152 households. Nationwide, first-quarter foreclosure rates were up 35 percent compared to the same quarter last year.

It wasn't so long ago that the lack of foreclosures was a sign that the market was in fine shape. Only a year or so ago, foreclosure rates in the state were at all time lows. The logic was simple; if there are no foreclosures, then people could obviously afford their exotic interest-only mortgages. However, foreclosures will always be low when the market is rising. If a homeowner runs into any repayment trouble, he or she can sell the house at a profit and return to renting. With the sudden downturn, this goes into reverse. Foreclosure is the only way out of a toxic loan.

Only a year or so ago, interest only loans fired up the Californian property bubble. Now, those same loans have started to push up the foreclosure rate. There are a lot more mortgages in California that could go bad. Foreclosures are the future in California.

Finally, the savings and loans regulator has discovered what every else has known for years - people have lied to get mortgages. Now, he recognises that this will make the housing crash worse.

And this guy draws a salary? What was he doing back in 2005? No wonder we are such a mess.

April 25 (Bloomberg) -- Cheating on mortgage applications is so widespread and so seldom punished that it's fueling an increase in foreclosures that will prolong the housing slump, said Robert W. Russell, counsel to the director of the Office of Thrift Supervision, which oversees savings and loans.

Borrowers and brokers commit fraud when they exaggerate the applicant's income, qualifying the borrower for a home he otherwise couldn't afford. Such fraud robbed lenders of an estimated $1 billion last year, according to data collected by the Washington-based Mortgage Bankers Association and the Federal Bureau of Investigation.

"Misstatements about employment and income are being made every day," Russell said. ``The brokers are just putting down on paper what the underwriters would require. There are borrowers providing false information as well.''

Loans that require little or no documentation of income soared to $276 billion, or 46 percent, of all subprime mortgages last year from $30 billion in 2001, according to estimates from New York-based analysts at Credit Suisse Group. Homebuyers with those loans defaulted at a 12.6 percent rate in February, compared with 1.5 percent of fully documented prime mortgages, said San Francisco-based First American LoanPerformance, a mortgage consulting group.

A 2006 study cited by the Mortgage Asset Research Institute showed that almost 60 percent of stated income loans were exaggerated by at least 50 percent.

Existing-home sales took the biggest tumble in 18 years during March. According to the NAR, home resales fell to a 6.12 million annual rate, a 8.4 percent decrease from February's revised 6.68 million annual pace.

The NAR again blamed bad winter weather. "For the last couple of months we've been expecting a weather 'hit' on home sales," NAR chief economist David Lereah said. However, he also conceded that subprime problems in the housing market might have hurt sales.

Althougth inventories of homes fell 1.6 percent at the end of March to 3.75 million, we are still a 7.3-month supply. Sales fell in all four regions of the U.S. Demand dropped 10.9% in the Midwest, 8.2% in the Northeast, 9.1% in the West, and 6.2% in the South.

So here is the key "take-away" from these numbers. Sales away down, inventory still high, all regions affected, the weather is still bad, and the NAR are in denial. In some respects, a fairly ordinary month.

Foreclosures might be heading for the stratosphere, prices might be crashing and inventory piling up, but local newspapers still find something positive to say about the real estate market.

Today's puff piece comes from San Francisco. In this article, we are being asked to believe that, the "market is back". We are asked to forget "the leaking bubble stories", and "never mind the doom and gloom". Suddenly, real estate agents are selling again, and picking up their undeserved 6 percent commissions.

Obviously, this article will make the hard pressed and increasingly wealth challenged realtors of the bay area happy. It is good that newspapers try to raise the spirits of people who are finding it hard to make a living. Spread the joy, that is what I say. However, it is not the truth. Reality for realtors is not a happy-clappy Wednesday morning revival meeting. The truth is falling sales volumes, rising inventory and no, I repeat, no commission.

Read on and laugh......

On a recent Wednesday morning, Jackie Cuneo entered her office meeting with a heightened sense of anticipation -- in a good way. She, along with about 140 other Zephyr Real Estate agents and brokers, crowded into a large conference room and politely sat for announcements of real estate forums, reminders to use the company intranet and an announcement from an agent soliciting donations for an upcoming charity marathon. All buzzed by quickly, and Cuneo, a Bay Area native, sat easily, sipping her morning coffee.

Then the show really began. "Anybody work this week?" deadpanned company co-founder and owner Bill Drypolcher from the podium, cocking an eyebrow. The meeting came alive. Hands shot up. Sales manager Don Saunders slipped between tables to hand people the microphone to announce their sales for the week. Cheers broke out and agents muttered amongst themselves. Nearby, a staff member kept a running tally of the results. A smile spread across Cuneo's face. It was her turn.

She introduced herself and made her announcement in a very businesslike way: She represented a buyer in the joint purchase of a tenancy-in-common on Casselli Avenue in San Francisco's Castro district. "It received eight offers," she rattled off. "It went five ways over."

A "way" is $50,000. The property sold for $250,000 over asking. The cheers and applause were louder and more raucous for Cuneo's announcement than for any other of the day, and Cuneo, who is friendly but a bit shy when speaking in public, laughed. Never mind the gloom and doom stories in the newspaper and on TV. Forget about a leaking bubble. In this room you could feel it: The market was back.

Forget toxic loans, say hello to financing toxic habits. In the UK, there is a bank that will help you get your daily fix of illegal drugs. Last October, an 18 year old heroin addict walked into the Nat West Bank, pleading for a $100 loan. In any normal society, a heroin addict would be politely shown the door by a 250lb security guard. However, in the UK, an addict, with no income, can get an unsecured loan for almost $2500. Moreover, they can spend in on drugs.

Here is the shocking story, which first appeared in the London times.

In October last year Hannah Mayne walked into the local branch of NatWest Bank and asked for an overdraft of £50. Although she was an unemployed teenager whose only income was from benefits, the man behind the counter said that would be no problem. In fact, she could have £1,200 if she wanted. Ten minutes later Hannah walked out with £850 in cash in her pocket and the facility to access £350 more. Three weeks after that she took a heroin overdose. She had spent every penny of NatWest’s money on drugs.

Taken on its own, the irresponsible way in which a bank will lend to a young person with no discernible way of paying it back these days is a worrying enough story. As the high street banks recently announced record profits, the Office of Fair Trading is demanding new rules to outlaw reckless lending. But what makes this case worse — much worse — is that the bank had been told by Hannah herself that she was a drug addict. Hannah’s mother, Kate, an interior designer who specialises in historical buildings, had persuaded her to do the responsible thing by cutting off her money supply for drugs. Together she and Hannah, then 18, visited her local branch in Brighton and asked it to stop giving her credit — by credit card or overdraft — because she was a drug abuser and would only rack up debts to feed her habit. The member of staff there listened sympathetically and wrote the details into her file. Kate and Hannah remember her turning the computer screen around and showing them what she had written.

But several months later, frantically trying to placate a dealer to whom she owed money, a dishevelled Hannah went to a NatWest branch again to chance her arm in pleading for £50 to offer him as an interim payment. She was, she says, amazed when the offer came back to lend her 24 times that amount. “I didn’t really understand when they said ‘You can have the money in your hand today’,” she says. “I was in there only five or ten minutes.” Anxious to get out of Brighton, she and a fellow addict disappeared to Birmingham together. While she was away her mother opened her bank statement and saw to her horror that Hannah was £1,199.97 overdrawn. Kate phoned the branch and told it in tears that the agreement not to give Hannah any more credit had been broken. “If she overdoses, I will hold NatWest responsible,” she said.

A few days later that is precisely what happened. The hospital in Birmingham called Kate and said that Hannah was in intensive care. If her friend hadn’t found her in the hostel, she would have died. The branch told Kate it could find no information about Hannah’s condition on her file because the computer would wipe off any notes after a certain period of time.

Hannah recovered, but that was by no means the end of her problems. It transpired that Natwest was charging Hannah £40 a month for the overdraft. Her entire income comprises £70 a week income support and £160 a month disability allowance. Kate urged her to apply for a special loan to pay it back but, in one of the strange anomalies of modern banking, she was told that she didn’t qualify because “her income is from benefits”. So, asked her mother, she qualified for the £1,200 overdraft while on benefits but not for a loan to pay that debt back? Yes, said the bank. This baffling — and, in Kate’s view, immoral — contrariness is one of the main reasons that she has decided to speak out about Hannah’s problems and the way in which the system generally, ranging from drugs support projects to the NHS, thwarts families trying to cope with a child on drugs. NatWest in effect, and irresponsibly, bankrolled her daughter’s overdose, she says. It offered a compromise deal in which it would waive the bank charges and Hannah could pay it off at £30 a month. The Maynes refused on principle since they maintained that it was the bank’s fault for having given out the money in the first place.

We all know about this recent trend. A quant old house on a large plot of land is torn down and replaced by a masive house that is totally out of character with the neighborhood. Now some residents in Fremont want to put a stop to to monster-home blight.

Ironically, the McMansion trend is well past its peak. The 2007 housing crash is making sure of that.

How far can a speculative bubble go? Judging by the Irish property bubble, it can go further than anyone can imagine. House prices in the Emerald Isle defy all understanding. Their housing numbers are so bizarre, so incredible and so inflated that they make the US bubble a model of restraint.

Consider the following 10 incredible facts about the Irish property market

1 - Since 1970, Irish property prices have increased by around 4,600 percent.

2 - Over the last 10 years, prices increased by an average of almost 14 percent a year.

3 - The growth rate has not fallen below 8 percent.

4 - One Irish worker in eight is employed in the construction industry.

5 - About a quarter of Irish GNP is dependant on construction.

6 - New residential housing construction makes up nearly 13% of GNP.

7 - There is one house for every 2.5 people.

8 - Since 2000, around 75,000 houses have been constructed each year - about a 5 percent increase in the housing stock each year for 6 years.

9 - Around 15 percent of homes are empty.

10 - In 2006, P/E ratios for private housing in some parts of Dublin were approaching 100. The rental yield in the city was just a little over 1 percent.

Take any measure of affordability, and Irish property looks bad. Examine housing inventory, and the market is saturated with supply. Look at personal debt, and the Irish are in so deep they can't see sunlight. And yet, prices just keep rising

When will it end? Who knows? Ireland is so vulnerable to a housing shock that this might be a secret to its durability. No one dares to stop the bubble, because when does finally come to an end, the Irish economy will literally collapse like a house of cards.

Nevertheless, there are tentative signs during the latter half of 2006 that prices have flattened out as a prelude to an all out crash. Moreover, housing construction needs only to fall back by about half and the unemployment rate in Ireland shoots up by 7 percentage points.

Everyday brings another extraordinary housing crash statistic. Today, California provides the housing horror. According to RealtyTrac, foreclosures in California are running at twice the national average. Metropolitan areas in the state now claim 6 out of ten highest places in the nation’s highest foreclosure rates.

According to the Mortgage Bankers Association, 119 out of every 10,000 home loans were at some step in the foreclosure process at the end of last year; 54 out of every 10,000 home loans entered the foreclosure process during the last three months of 2006. That is a record -- the previous record, at the end of a recession in 2002, had been 50 new foreclosures for every 10,000 loans.

Overall, one of every 775 U.S. households had a foreclosure filing during March. California's rate of one for every 389 was almost twice that. Nationally, foreclosures were up 7 percent from the month before, although California was up 36 percent and trailed only Nevada and Colorado for the highest rate of foreclosures.

Sometimes, it takes more than just love to keep a marriage going. Now, the housing market is here to help sustain those rocky relationships, teetering on the edge of divorce.

Today, homeowning couples don't need to argue over who gets the Britney Spears CDs. There are now much bigger issues to resolve; how will they pay the realtor commissions and the negative equity debt.

Here is a story from the Washington Post, hightlighting the financial difficulties of home owners who want to break those marital vowes.

Jeffrey Taylor and his wife bought their dream home in Purcellville for $538,000 last August. Now they have to sell it because they are getting divorced and neither one can afford the mortgage alone.

The most they could get for it was $430,000. After paying all the real estate commissions and taxes, they will still owe the bank $118,000. A nontraditional mortgage and a prepayment penalty mean Kimberly Pexton and her husband will owe $28,000 at closing. Five months later, I lose $100,000," Taylor, a high school teacher, said. "I don't think I can take $100,000 into the stock market and lose it faster."

Such a scenario, known as a short sale, was unthinkable during the real estate boom of recent years. In the course of five months, a person could buy and sell a property and walk away with tens of thousands of dollars. Now, instead of receiving large checks at the settlement table, many sellers are writing them.

Are you ready to buy a new home? This realtor add tries to persuade you that now is the time to go out and buy. This add is rather like someone telling you to leave your cellar and walk into a force 5 hurricane. Personally, I am going to stay in the bunker. No house purchases from me, thank you very much.

But are you ready? Thought not.

Who are the big league borrowers? Which governments have built up the largest stocks of debt?

War-torn Lebanon comes top of the list. Currently, they owe two times annual income. Not far behind comes Japan, owing almost 1.8 times annual income. Three of the top ten are from Europe, and 3 are developing countries. At least five of these countries have serious demographic problems - Japan, Italy, Greece, Signapore and Belgium. This debt will need to be repaid just as most workers will be heading from the retirement homes. Eygpt is the only Arab country. If only they had oil instead of pyramids.

Zimbabwe is on the list,not because the government borrowed huge sums. Rather it is there because the Mugabe decided to destroy the economy. As the economy declines, it becomes increasingly harder to pay the debt back.

So where is the US on this list? It ranked 30th with a public debt to GDP ratio of 65 percent. Hong Kong was the least indebted country (for the 120 countries who publish data). Its debt to GDP ratio was just one percent.

Greed and fear are the two great motivators. However, if greed dominates fear, then we become blind to some obvious dangers.

Recently, something went badly wrong with the US mortgage market. Somehow, people forgot fear and focused on greed. Banks started to give out loans without considering whether people could pay the money back.

Normally, bankers should treat all potential borrowers with the utmost fear. Borrowers can destroy banks. Borrowers can default on loans, delay payment and provide fraudulent information. If I may paraphrase Mad-Eye Moody from Harry Potter, Banks need "constant vigilence" when confronting those nasty potential defaulters and defrauders that go under the name of borrowers.

Here is an article from It sheds some light on how banks stopped fearing borrowers and just handed out cash without any serious consideration of the risks. The answer appears to be straightfoward. Incentives changed. Origination volumes became more important than long term profitability.

Soon, the pendulum will swing the other way; greed will stand aside and fear will take over. Banks will tighten credit, risk premia will again become important, and as credit becomes more expensive, both consumption and investment will fall. When that happens, an old ghost will return to haunt America – recession.

The nonprime mortgage business is in a mess because during the boom years, hardly anyone had an incentive to say no.

The people who take applications, the companies that lend the money, the appraisers who check property values, the investment banks that sell mortgages to investors and the investors themselves -- all had millions of reasons to keep mortgages flowing to borrowers who couldn't afford them. Each reason had a dollar sign attached to it. As long as each participant kept saying yes to risky borrowers, everyone made money.

"It's like we were originating willy-nilly, with abandon, and the consequences be damned," says Christopher Cruise, who trains brokers and loan officers. "As Americans, we're accustomed to not being told no. ... If we want to have a mortgage loan and we want it now, we don't want to hear about the potential consequences down the road."

That goes for borrowers and also for the players throughout the mortgage industry. The siren song of bountiful paychecks drowned out the murmurings of conscience.

"Are there individuals and folks in the supply chain here and there that don't care, or don't necessarily have the borrower's best interest at heart?" asks Jim Svinth, chief economist for "Yes. But that can be said about just about any industry where people are paid on commission."

Make the deal, dump the risk

Much ink has been spilled on the meltdown going on in subprime mortgages, which are home loans for people with flawed credit histories. Analysts believe problems will show up in Alt-A mortgages, which go to borrowers who have so-so or even good credit, but who don't document their income or assets. A lot of interest-only loans can be lumped into the Alt-A category, too. Together, subprime and Alt-A are known as nonprime.

The mortgage industry is set up in such a way that the participants chase after profits while dumping the risks onto someone else. The chain of buck-grabbing and buck-passing starts with mortgage brokers and loan officers -- the men and women who work face-to-face with borrowers.

Brokers and loan officers make their livings by persuading people to get mortgages. There's no profit in telling an applicant that he has no business buying a house. Except in cases of flagrant fraud, brokers and loan officers don't suffer consequences if their customers later fall behind on their house payments.

'We don't really care'

"For us, as frontline originators, there isn't a direct correlation between loan performance and compensation, so we're disconnected from these failures so long as there's no fraud. In a way, we really don't care that much," Cruise says.

If that sounds harsh, here's what two other mortgage men have to say:

"They have no skin in the game. They'll do anything to get a commission," says Bob Walters, chief economist for Quicken Loans.

"The loan officer's incentives are not aligned with the consumer or the lender," says Jeff Lazerson, president of Mortgage Grader, a flat-fee mortgage brokerage where brokers don't draw commissions.

Behind the brokers and loan officers are the companies that do the actual lending. During the nonprime boom years of 2003 to the middle of 2006, lenders had an incentive to approve mortgages to uncreditworthy borrowers because lenders don't hang onto loans for long. They sell most home loans to investors. Lenders thought they were in the clear after selling loans: If the borrower fell behind on the payments, the investor -- not the lender -- would face the consequences.

1. In March, US home foreclosures rose 7 percent from February to 149,150.

2. The figure was 47 percent higher than a year ago.

Need we say more........

Americans are becoming increasingly dependent on the plastic.

· In January, revolving credit, which is largely credit card debt, was up 6.4 percent over the previous year.

· Credit card debt is running at the 14.5 percent of after-tax income. This debt is the highest level on record.

· Interest rates on credit cards average more than 13 percent. That is the kind of interest rate that would make loan sharks blush.

Here is some free financial advice. It is never a good idea to carry credit card debt. If you can't pay off your bill in one month, then don't use your card.

What do you have to do in order to become a Californian mortgage broker? According to this advertising, it takes just two things; attend a two-day course and write a cheque for $3,995. After that, it appears that you can sell mortgages to anyone dumb enough to listen to your sales pitch. I don't know about you, but I feel like a career change. If it is this easy, then I am signing up.

I just love this sales pitch:

"The First Loan Broker Training Program that Guarantees You Will Become a Professional Mortgage Broker Certified and Licensed by the State of California, or Your Money Back -- in Only 2 Intensive Days, with Absolutely No Tests, and No Experience or Degree Required all for one fee of only $3,995!"

I keep saying this, but there really isn't any mystery why the housing market is sliding into the abyss.

This chart tells us two things about the future.

First, that it takes about five to six years after a price slump before foreclosures hit the peak. During the last housing bubble, prices stopped increasing in 1990. However, foreclosures peaked in 1996.

Second, the peak will be a lot higher this time. California is just one year into the housing crash. However, foreclosures are fast approaching the horrendous peak recorded in 1996. In fact, the acceleration in foreclosures is nothing short of frightening.

Just push that graph out about a year, and foreclosures will easily exceed the levels recorded in 1996.

Congress did the numbers on a sub prime bailout and realized that the cost was too high. Barney Frank, chairman of the House Financial Services Committee , said today "Legislation going forward will not help this current group of people (i.e. subprime borrowers) who are entrapped". That is right, Barney, they are forsaken and doomed.

Instead Federal lawmakers will "focus on steps to protect consumers from bad mortgages in the future". However, predatory lending practices are as old as the hills. New legislation is not needed, but there is a need to enforce the law. These practices were tolerated by a financial regulator unwilling to restrain a profitable business built on exploiting the poor and vulnerable.

Congress should leave the law alone. Instead, it should seek accountability from the Fed. Firing Bernanke would make a good start. Hauling Greenspan before congress would be an effective follow up.

There are some who think that the housing crash will only affect those late-to-the-party fools who bought in 2006. Not so, says Kenneth Heebner a manager at a top-performing real estate fund. Prices could roll back to the levels seen in 2003.

Heebner Says Home Prices May Fall 20% Amid Bad Loans

April 12 (Bloomberg) -- Kenneth Heebner, manager of the top-performing real-estate fund over the past decade, said U.S. home prices may plunge as much as 20 percent because of rising defaults on riskier mortgages.

Subprime loans, made to borrowers with a history of missed payments or untested credit, and ``Alt-A'' loans, which require little or no documentation, account for about $2.5 trillion of the $10 trillion in outstanding mortgages, according to Moody's As much as 40 percent of these loans may default, flooding the real estate market, Heebner said.

"It will be the biggest housing-price decline since the Great Depression" Heebner, 66, said today in an interview in Boston. Prices may fall by a fifth in some markets, he said.

That would leave home prices at levels last seen in 2003 and 2004, the middle of boom that lifted prices to a record in 2005. The damage from high-risk mortgages will slow the U.S. economy, though not enough to send it into a recession, Heebner said. Fourth-quarter growth was revised to 2.5 percent from 3.5 percent because of housing, the government said March 29.

Heebner, who co-founded Capital Growth Management in 1990, manages the $1.6 billion CGM Realty Fund. The fund has gained an average of 20 percent a year in the past 10 years, the most of any real estate fund over that period, Bloomberg data show.

Hope springs eternal, however this spring, hope for the housing market is in short supply. Instead , the market is being crushed by an avalanche of bad news stories.

• The housing construction industry is sliding into recession. Housing starts are currently running at a rate of about 1.5 million, similar to those of 2003. Housing starts had peaked in mid-2005 at a rate of 2.1 million

• D.R. Horton - the largest U.S. homebuilder - said this week that orders for new homes tumbled 37 percent last quarter and that the spring housing season has been much slower than usual.

• The National Association of Realtors finally admitted what everyone knew for at leat a year – the bubble is over. The NAR now expects the median price of existing homes to drop this year, with its index of home values set to drop for the first time in nearly 40 years.

• Countrywide Financial, the largest U.S. mortgage lender, said last Thursday that the proportion of mortgages in its portfolio that are in foreclosure nearly doubled.

• The mortgage-implode-o-meter is now at 56.

Can it get worse? Just wait until summer.

The sub prime bailout is a major theme with this week's bubble blogs. Rancid truth asks "how much will it cost to rescue those financially illiterate cretins who were so-called "bamboozled" and "hoodwinked" into sub-prime mortgage loans by mortgage brokers and realtors in order to purchase homes that they could otherwise never afford? How about $US 120 Billion?"

OC fliptrack highlights one of those horrific flips-gone-bad in Orange county. This particular flipper has cut his price from $589,000 to $515,000. It reminds me of a line from the first (fourth) Star Wars movie - "I don't care what universe you are from, that has gotta hurt".

Congratulations to Young and Broke, who got a mention in the Your Money section in Sunday's Tribune in Gregory Karp's "Spending Smart" column.

The "mess that Greenspan made" has a scathing piece on the over-optimistic interpretation of recent inflation data "After Friday's report on Producer Prices, in which the overall monthly increase of 1.0 percent followed February's gain of 1.3 percent and ignited a stock market rally based on "easing inflation concerns", it should be clear that the relationship between prices and investor outlook is completely dysfunctional." The piece points out how many central bankers rip up those sub indices that are rising, and then proclaim inflation is under control. Or as Tim puts it "Sure, when food and energy are stripped out, the result was no change from the month prior and this "core" rate of producer price inflation is purportedly a better indication of the underlying trend when these "volatile" components are removed."

It is good to see that the Baltimore Housing blog is up and running again.

Politicians always like big-ticket projects. However, no country can match the big-ticket madness in North Korea. Over the last 15 years, North Koreans have suffered from famine, while their government has poured precious resources into building nuclear weapons. At least, the nuclear project resulted in some payback. Kim Jong-Il successfully blackmailed his neighbours and secured free supplies of fuel. What's more, more goodies are on their way. So long as they stop producing the weapons of mass destruction, the North Koreans will begin to receive free shipments of food aid.

Before the North Korean went nuclear, they had Ryugyong hotel project - an empty 105 floor concrete shell in the centre of Pyongyang. The word big always had a strange fascination for communists. Somewhere in the mid-1980s, the North Koreans got into their heads that is to build the world's largest hotel. North Korea is already the world's largest prison camp, where it is almost as difficult to get in, as it is to get out. A simple examination of tourist numbers should have told the North Korean leadership that there was not much demand to visit Pyongyang. Economic rationality was not driving this decision. This was a competition with capitalism; big was what mattered and the North Koreans were going to win - big time.

The builders started mixing the contrete in 1987. The designers settled on a mountian motif, with three wings converging to form a pinacle at 1,083 ft. Some hotels boast a rotating restaurant; but for the North Koreans, one swinging eaterie was not enough. Instead, they decided that they needed seven rotating restaurants. If the hotel had been finished, it would have boasted over 3,000 rooms and 3.9 million square feet. Japanese newspapers, who followed the project with awed disbelief, estimated the cost of construction was $750 million, or about 2 percent of North Korea’s GDP

However, in 1992 construction suddenly stopped. No one knows for sure why, perhaps the country ran out of concrete, or it could have been due to the famine that ravaged North Korea in the early 1990s. Perhaps the authorities were tired of the hotel trade and decided to go nuclear. Nevertheless, the concrete shell remains, leaving the authorities with the difficult question – what do you do with an empty 105-floor half-completed hotel?

In North Korea, there is an answer to every economic difficulty, and that answer is the foreigners. The North Korean government set up a firm - the Ryugyong Hotel Investment and Management Co – as a vehicle to attract the additional $300 million required to finish the project. The government even promised that the potential investor could “operate casinos, nightclubs or Japanese lounges if they want to”.

Now that the North Korean government successfully extorted fuel by threatening its neighbours with nuclear destruction, perhaps they could find a foreign investor using a similar method. All Kim Jong-il needs to do is call up some of the the world’s hotel chains and threaten annihilation. It might work; it certainly worked on the US government.

(The Ryugyong hotel project can be seen on Google Earth - 39° 2′ 11″ N
125° 43′ 50″ E)

You have to hope that the following story is an extreme one. If it isn't, then don't worry about the US housing market, that is already dead. Start worrying about the US banking system. If the case of Alberto and Rosa Ramirez is a common one, then we are looking at a US banking crisis, that could match the S$L shambles from the 1980s.

The story is simple enough; two poor families pool their resources and buy a house in a fancy area. Although the initial monthly payments are beyond their monthly income, the mortgage broker tells them that they can refinance at a lower rate in the near future. Of course, interest rates increase and refinancing becomes impossible. The house quickly goes into foreclosure, and Ramirez family is back where it started.

Some people might blame the Ramirez family for the mess that are now in. Certainly, they do bear some responsibility. However, the financial sector is supposed to be regulated. The world has suffered from enough banking crises to know that lax lending standards is the road to financial ruin.

The Ramirez family should have never received a mortgage. Furthermore, it is not the case of the government protecting the Ramirez family from themselves and their own stupidity. Rather, society needs to regulate unscrupulous lenders because when they go bust, credit contracts, and often sends the economy into recession.

"When Alberto and Rosa Ramirez began looking for a home, they never imagined that 18 months later they would personify a national real estate crisis. It's not that they bought a house with walls crawling with toxic mold or inherited an insane neighbor next door or, even, God forbid, that they didn't buy at all. They bought, and they love their slice of the American Dream. "It's all very nice and beautiful," Rosa tells me through a translator. "The neighborhood is very peaceful. The problem is not with the house at all. It's the price of the house."

Indeed, in a different era (when housing prices were lower), their story might have been one of those bootstrap tales about homeownership transforming immigrant lives. The husband and wife work as strawberry pickers in the fields around Watsonville, and each earns about $300 a week. They have three children. Not only did they dream the impossible dream, they managed to finance it.

It all began when they were talking to another family about escaping their subsidized apartments and getting a real house. The other couple -- Jesus Martinez and his wife, who also have three children -- work as mushroom farmers, earning about $500 a week each when there is work. The two couples decided to pool their resources and begin house-hunting. Given their total income, they estimated that they could afford payments of $3,000 a month. They spotted an ad in the local magazine La Ganga for Maria Avila of Rancho Grande Real Estate and called her.

"We wanted to live in Watsonville," says Rosa. "But [the real estate agent] said the houses there were older and more expensive." One of the first homes they were shown was a "new" four-bedroom, two-bath house in Hollister for $720,000. When the Ramirez's heard the price, they worried that they couldn't afford it.

But the couple says that their real estate agent and broker reassured them it was possible. "The monthly payment was supposed to be $4,800, but then after we bought it, it went up to $5,378," says Rosa, speaking of their zero-down mortgage with a one-month "teaser rate." "Our agent told us that once we refinanced, we could get the payments down to $3,000 or less." For a number of months Avila, who arranged for the loan with New Century Mortgage, paid the difference between what the buyers had said they could afford -- $3000 -- and the actual loan payment. According to the buyers, this arrangement was supposed to carry them over until the group refinanced.

The money-saving refinance failed to materialize, and eventually, Avila stopped subsidizing their current mortgage. (According to my analysis of interest rates during the period, hitting the magic $3000 number would have been virtually impossible under any circumstances. An interest-only $720,000 loan at a miraculous 5 percent interest rate (15-year fixed) yields a $3,000 mortgage, but such low mortgage rates weren't available to anyone much less a laborer with a low income, no down payment and no other assets. Plus that doesn't count another $750 a month in taxes and insurance.) The two families stayed on the same loan, sometimes sacrificing basic necessities, other times borrowing more. "It was very difficult," Rosa says. "Sometimes we would eat less, and we took out personal loans from Bank of America."

Maria Avila and Rancho Grande Real Estate declined to comment for this story. Earlier this month, New Century Mortgage, the nation's second largest sub prime mortgage lender, filed for bankruptcy. It's also facing a federal criminal probe. "

It is remarkable how often one sees the name Robert Schiller in the mainstream media these days. It is as if the prophet has come back from the wilderness. Back in 2000, he justifiably made his reputation as the man who predicted the collapse of the bubble. However, when he turned his sights on the housing market, people just didn't want to hear from him. People were too busy counting up the so-called equity accumulating in their homes, and his message of serious overvaluation and speculative behaviour was most unwelcome.

Today, he gave an interview, and made some obvious points about the real estate market. For example, he observes that if house prices are increasing 10 percent a year, then fairly soon no one can afford one. Perhaps more shockingly, he points out that over the long-term the return from owning a house is fairly close to zero.

Question: What caused the stock bubble, and why did it end as it did?

Answer: Some sociologists talk about collective consciousness. We humans evolved to be very closely linked, and our minds focus on the same ideas. Those [ideas] get reinforced because we hear them all the time.

Back in the late 1990s, you kept hearing that you had to stake your claim on the Internet or you'd miss out on the future. No one cared about the present. Then something happened around March 2000. There was an acceleration of public talk about doubts. You could no longer declare at a cocktail party that Internet stocks were going up. Such statements had become embarrassing - and just like that, word of mouth changed.

Embarrassment is a powerful emotion.

Question: Is that about to happen in real estate?

Answer: It doesn't seem like we're there quite yet. But this is the biggest boom in housing prices since, well, ever. Nothing seems to explain it, and nobody forecast it. It seems to me...wait a minute. Please don't quote me as forecasting the markets.

Question: Okay. What you're about to say is not a forecast.

Answer: Well, human thinking is built around stories, and the story that has sustained the housing boom is that homes are like stocks. Buy one anywhere and it'll go up. It's the easiest way to get rich.

Question: So how rich can you get on real estate?

Answer: From 1890 through 1990, the return on residential real estate was just about zero after inflation.

Question: Excuse me? That's all? Hasn't it been higher lately?

Answer: Since 1987 it's been 6 percent [or about 3 percent a year after inflation].

Question: So real estate doesn't go up roughly 10 percent a year?

Answer: It can't be true that homes rise 10 percent a year. If they did, in the long run no one would be able to afford a house.

Question: Let me grab a calculator. If real estate really rose 10 percent a year, a $25,000 home in 1957 should be worth roughly $3 million now.

Answer: And that flies in the face of common sense. In fact, I'm inclined to think there's a good chance that the return on real estate will be negative, substantially negative, over the next 10 years because all booms reverse in the end.

Question: All right. We won't call that a forecast either. So how should people think about their home as an asset?

Answer: Avoid concentration of risks. You need a house, but I would avoid a second one - or at least avoid an outsize house. Over-investing in real estate now would be a recipe for disaster.

Question: You also write about the risk to human capital. What's that?

Answer: What you're trying to do is to invest in skills that somebody else will want to pay you for. Let's say you want to work at Bethlehem Steel. That would have been a good idea in the 1950s, not so good by the 1970s. The world went the wrong way on you.

Question: How can you manage that risk?

Answer: I used to coach children's soccer, and I would tell my players, "Stand away from the pack, and sooner or later the ball will come to you."

In your career choices too: Get away from the pack. Also, you associate your home country with safety. But the rest of the world is pretty peaceful too, on average, and the average is all that matters.

I think relatively few [Americans] are getting away from the pack, investing more outside the U.S. than in.

Question: How are you investing now?

Answer: I'm probably a little over 60 percent in stocks, almost all of it outside the U.S. I have a lot of cash. And I've been reducing my exposure to real estate. It may be at the end of a cycle.

It is one of the great mysteries of the modern age; why was so much of this housing bubble so obvious, so predictable, and yet so difficult to avoid. It is a comparatively simple matter to examine housing data and see prices diverging systematically from long-run trends. It is also straightforward to look at house price to income ratios and see that housing had become unaffordable for all but the most affluent. Yet despite these obvious indicators, Americans chose to ignore the obvious and instead believe the unbelievable; namely, that house prices could continue to grow in excess of 20 percent a year.

This mystery is all the more difficult to understand given the experiences of the stock market in the late 1990s. The parallels between the bubble and the recent housing fiasco are almost too obvious to highlight. However, given the widespread desire within society to believe the unbelievable, it is sadly necessary to state the obvious. In both bubbles, people were being asked to believe that economic fundamentals were no longer important; that there was something different this time, and that conventional ways of doing things were suddenly redundant.

However, ordinary homebuyers were not the only group to fail to see that the housing market was degenerating into a speculative mess. Journalists, particularly those working on local and regional newspapers, were also susceptible. No doubt, many journalists owned modest properties, and were elated when property prices started to rise. They wanted to believe, like so many property owners, that getting rich was merely a matter of holding on to an asset and waiting for it to appreciate. Given this strong desire to see prices rise, journalists often blinded themselves to obvious indicators of property overvaluation.

Wishful thinking can never overcome the realities of supply and demand. As sure as night follows day, the housing bubble popped, prices began to sink, and elation was followed with despair. Today, we are increasingly seeing newspaper headlines that should have been published five years ago.

Consider, for example, today's headline in the Washington Post "Housing boom tied to sham mortgages". The article recounts the activities of Phillip Hill, who "lured people to fancy cocktail parties in a $1.9 million mansion. He asked to use their names and credit histories in real estate deals, promising to make them rich. Most got $10,000 checks on the spot for signing up. By the time the scam unraveled, the credit of those participants had been ruined, hundreds of upscale properties had fallen into foreclosure and real estate prices had plummeted in some of this city's most exclusive neighborhoods. Hill is about to go to federal prison".

However, the article also points out that since 2000 mortgage related fraud has increased tenfold. Let us consider that statistic, it saying that mortgage fraud increased by 1000 percent in seven years. The growth in mortgage fraud makes the housing bubble look like a blip on the chart. So how is it that journalists failed to notice this explosion in housing-related crime? Why weren't they exposing the activities of people like Phillip hill back in 2002?

The answer is straightforward enough. They were too busy writing feelgood stories about the Washington real estate market. Rather than doing their jobs, they wanted to believe the unbelievable, ignore the obvious, and as a consequence failed to report the truth.

Mortgage lenders are falling like flies. Today, it was the turn of American Home Mortgage Investment to tell its investors about the sorry state of the US housing market. The company slashed its dividend and 2007 profit forecasts. Several analysts quickly responded to the dismal news and downgraded its stock. Subsequently, the share price sank as much as 18.2 percent.

The company cited a lack of buyers for its loans, as well as rising delinquencies, for its lowered forecast. It joined M&T Bank among lenders to cut profit forecasts. Moreover, there are increasing signs that weakness afflicting sub prime mortgages may be spreading to higher-quality loans. American Home specializes in prime and near-prime loans and makes roughly 2.5 percent of all U.S. mortgages.

The disease that nearly destroyed the sub prime market is now spreading to the prime and near prime mortgage market. According to FirstAmerican LoanPerformance, In February, 2.6 percent of Alt-A loans were delinquent by 60 or more days, up from 1.2 percent a year before.

Just wait, soon we will see stories about higher delinquencies among prime mortgage lenders.

Housing bubble firesales are gaining in popularity among buyers and sellers as a quick and easy way to dispose of property in a crashing market. Hudson & Marshall - America's largest real estate auction firm - are doing a roaring busisness. On April 21, the company will auction nearly 50 foreclosed homes in Denver. The homes, now owned by national lenders and asset management companies, are valued from $25,000 to over $500,000.

House auctions are becoming the preferred way for mortgage lenders to quickly dump unwanted properties. In Colorado, it is boomtime for the foreclosure business. According to Realtytrac, in February, the state suffered one foreclosure filing for every 345 households, making the state's foreclosure rate the second highest in the nation. In February alone, Colorado reported a total of 5,310 foreclosures.

All properties available on April 21st are sold "as is". Interested buyers are encouraged not to bid on any home they haven't seen. Buyers can view an entire list of properties online at

Some people think that realtors are a parasitical profession. For just posting an advert on the MLS system and showing some suckers around an overpriced house, they demand a six percent cut of the selling price.

For those who find the realtor exams a little tough, there is a new profession for wannabe parasites - a home staging consultant. House sellers call these jokers in when the house is stuck on the market. For a fat fee, these "consultants" come to your house and tell you to tidy the place up before the house buying sucker comes to visit.

In order to qualify as a Home Staging Consultant - you will need to take a "30 hour intensive immersion course". This program is "jam packed with practical ideas and sound business practices honed by years of working in the field". There is also an organisation that can rip you off with membership fees - the Certified Staging Professional.

The emergence of this new "profession" with their "intensive training programs" is yet another sign that the market is in trouble. Does anyone remember a time when a crappy slumhouse would go on the market on a Friday, have an open house on s Sunday and sold on a Monday. The breakfast dishes were still in the sink; the beds weren't made and the house was still holding the a strong body odour of the hygiene-challenged owners. That sort of thing was common two years ago. Today, that kind of house just doesn't get a visit.

So along comes the house stagers. These consultants are there to help sustain the denial. "It is not about the price, it is about the dirty laundry under the bed". For those desperate to sell, avoid the homestagers. Reconsider the price. If it ain't selling, it is over priced. Cut, cut and cut again. Eventually, there will be a buyer out there for your house.

The delivery of this video clip is definitely wierd. However, the commentary is compelling.

In this particular video, Strange Gordon slams London as being the international center for money laundering. Of course, the London housing market is in on the scam. The message is clear; if you have the cash, London loves ya.

Gordon finishes the video with a bombshell factiod. Although London has some very tough anti-money laundering legislation, there has not been a single prosecution of a UK banker for handling dodgy money. Given that one in five house purchases over $1 million is bought by a Russian, this beggers belief.

So there you have it. London isn't just the most bubblicious city in the world. It is the money laundering center of choice for the world's criminals.

This is the only chart you will ever need for the US housing market. It is the famous Shiller chart, from the man you brought you Irrational Exuberance.

The chart is simple enough. It plots two long term series; real house prices adjusted for inflation and real rents adjusted for inflation. It make two simple points. First, in the last 100 or so years, US house prices, in real terms, have never been higher. Second, renting a house, in inflation adjusted terms, is close to its all time low.

Print the chart out. Put it in your wallet or stick it in your purse. Everytime you hear someone talking about real estate, pull it out and just show them the chart and say just one short sentence comprising of 20 brutal but truthful words.

"In the last century, it has never been more expensive to buy house or more cheaper to rent than today."

Check out this great post by Brad Setser. He examines what he calls three "dated perceptions of China", namely:

1. Crappy banks - Chinese state owned banks are filled with non-performing loans,

2. Externally balanced trade - China runs a surplus with the US but a deficit with the rest of the world, so its trade is in rough balance and finally that

3. A technologically deficient economy - China just assembles imported components with little value-added.

Not so, says Brad. Time to correct those outdated ideas about China.

Japan is holding a mountain of US dollars. The Finance Minstry in Tokyo reported that Japan's foreign exchange reserves rose to an all-time high of 908.96 billion dollars at the end of March from the previous record of 905.05 billion dollars in February. Japan's large foreign exchange reserves are the result of years of currency intervention by the government to keep the yen down against the dollar and help exporters stay competitive. In other words, the Japanese have kept the Yen artiificially low so that they could flood US markets with cheap goods.

However, the Japanese are not the only ones playing this game. Japan’s foreign exchange reserves are the second largest in the world, after China, whose holdings reached 1.07 trillion dollars at the end of 2006.

A day does not pass without more news about the US housing market. Today, it was the turn of the Mortgage Bankers Association to supply the doom and gloom. Loan applicationss are down.Their seasonally adjusted index of mortgage applications fell for the third straight week, dropping 3.2% to 649.5 in the week ended March 30. The MBA's seasonally adjusted purchase index declined 2.0% to 402.9, while its refinancing applications index fell 4.5% to 2,098.3.

There was further bad news on interest rates. Borrowing costs rose for all loan types. The average 30-year fixed-rate mortgage, excluding fees, rose 0.09 percentage point from the prior week to 6.13 percent.

This week, the London Times carried a story claiming that a retiree, aged 102, received a 25-year mortgage. However, there is little realistic chance of repayment. He will have to live until 127 before he makes the final payment. According to the article, this guy is a property investor who has taken out an interest-only £200,000 mortgage. He plans to meet the £958 monthly repayments with income from rent.

The broker who arranged this deal - Jonathan Moore, of Mortgages for Business said. “Obviously there is an element of risk if property prices and rental income suddenly fall but there is no sign of that at the moment.” What about the risk that this investor dies in the next six months? More generally,it is hard to see how this 102-year-old man understood what he was signing.

The story generated a response from a UK group representing retirees. Gordon Lishman, the director-general of Age Concern, said: “It’s crucial that people think about the long-term implications.” When you are over 100 years old, next week is long term.

The UK housing market – it is absolutely insane.

When housing markets crash, they do it in slow motion. It is not like the stock market. Housing market disasters take years, sometime decades to mature. However, along the way, certain events mark out the path to collapse.

Today, the housing market put down another marker on the path towards financial meltdown: the sale of sales of bonds backed by subprime mortgages are tumbling. Investors and bankers have suddenly discovered rising delinquency rates and now they are pulling back from what had been one of Wall Street's fastest growing businesses.

So far this year, the stock of subprime mortgage backed securities is down around 37 percent compared to last year. This comes as around 13 percent of sub prime mortgages are now experiencing some kind of payments related problem.

As investors run fearfully from the sub prime mortgage backed securities, sub prime lenders will no longer be able to bundle up their crappy loans and take them off their wobbly, default prone balance sheets. Inevitably, these lenders will start to reduce the number of loans they issue. As people with poor credit find it increasingly difficult to get financing, housing demand will decline. With declining demand comes falling prices.

However, the recent problems in the sub prime market should be seen only as an intermediate step towards the deeper market catastrophe. Just wait until the Alt-A market starts to sink. It will not just be the poor, the minorities and the vulnerable who will be crying on their doorstep as they lose their house to foreclosures. Many ordinary middle class Americans will also be fast-tracked to homelessness.

I rent, I rent, I rent, I live with my parents........

Somehow, I don't think we need to worry too much about interest only loans. They have become rather expensive lately. In fact, rates on interest only loans are almost the same as on 30 year fixed rate mortgages

However, go back to 2003, and interest-only loan rates were below 3.5 percent. Moreover, there was a significant spread relative to fixed rate loans - at times, the spread was 150 basis points. As the housing market wobbled and then crashed, that spread has declined. Today, there is little advantage taking on an interest-only loan.

Just one more reason why the housing bubble is over.

Here is a much-underpublicised story. Radi al-Radhi, head of the Iraqi anti-corruption committee said, “The estimated value of the wasted sum because of administrative and financial corruption is eight billion dollars,"

Radhi blamed the constitution for some of the funds lost; saying one of the clauses in the Iraqi law blocked the launching of legal action against government employees. "Article 136 B stipulates that no civil servant should be sent for trial before the consent of his minister," the statement quoted Radhi as saying. The article was obstructing investigations into the "lost money". So the wonderful Iraqi constitution has a clause to protect rotton and corrupt government officials.

Radhi also said that his panel was investigating around 180 employees of the oil ministry in the southern port city of Basra following reports of corruption.

If only that $8 billion were available to bail out the sub-prime lenders.

Today, the National Association of Realtors released some rather dismal pending home sales data for February. The index dropped 8.5 percent compared to the same time last year.

However, the NAR blamed the weather for the poor data. David Lereah, NAR's chief economist, said in a statement that "unusually bad weather in February" might have caused the index to slip.

Does anyone remember the NAR talking about the weather when house prices were powering ahead at double-digit growth rates? Personally, I do not have the energy to go back and check on all the daft things the NAR said back in 2005, but I do not remember them saying anything like “unusually good weather in February” might have caused the index to rise.

Meanwhile, this massive fall in pending sales sent housing stocks northwards; Pulte Homes rose 2.9 percent; KB Home rose $ 2.9 percent, while Toll Brothers Inc.increased 2.5 percent. Therefore, while housing industry sales are tanking, investors think that that new homebuilders are a good investment.

One needs some twisted logic to reconcile higher stock prices with lower sales. It seems that Wall Street expected pending home sales to fall by more than 8.5 percent. Since it was only 8.5 percent and not 9.5 percent, Wall Street investors are buying KBH and Toll. The lesson here is obvious, too much pessimism can be a good thing for a company’s stock price.

Who ever is buying this stock, let us hope that they know what they are doing. I am just glad that these "investors" aren't using my money.

Like so much of this housing bubble, everyone knew what was coming next. Everyone knew that New Century Financial would file for Chapter 11 bankruptcy protection. On Monday, it sent the papers to the Delaware bankruptcy court. The forlorn subprime lender announced that it had a $100 million hole in its balance sheet.

Sadly, over 3,200 employees have lost their jobs as a result of the lax lending standards and poor management at New Century. Let us all hope and pray that all former New century employees find work soon.

Does anyone remember the Savings and Loans crisis in the 1980s? Or is that just too far back, too distant a memory to tell us anything about the mess we are in today? For those too young, or too old to remember, the S&L crisis was a financial disaster from the 1980s. Around 1,000 savings institutions failed, costing the US taxpayer around $125 billion. Moreover, those were real Paul Volcker dollars, and not the near worthless Greenspan-inflated dollars of today.

Back in those days, each community had its own S&L, or as they were more commonly known – thrifts. They were tightly regulated; in particular, there was a ceiling on deposit interest rates. In general, these were conservative institutions, offering simple loans at fixed rates, and in general checked up on the creditworthiness of their clients.

In the late 1970, interest rates started to rise. However, the S&L balance sheets soon started to suffer. Their assets were all fixed rate loans, at low interest rates. Other institutions, particular money market funds, started to offer more attractive interest rates. Soon, depositors started to withdraw funds from the S&Ls, who had to sell off their low income assets in order to cover withdrawals. Often, the S&Ls had to discount the loans and very quickly, the S&Ls started to lose money.

Where do US financial institutions go when they start to lose money? Why, they go straight to Washington and ask the government for help. Sure enough, Carter came to the rescue, and deregulated the S&L industry. Restrictions were lifted on the types of loans that S&Ls could offer. In effect, S&Ls became like regular banks. Congress also did its part. In 1980, Congress raised the limits on deposit insurance from $40,000 to $100,000 per account.

Although the deregulation gave S&Ls many of the capabilities of banks, they were not subject to the same supervisory regime. Therefore, these poorly supervised and largely inexperienced institutions literally went mad on the real estate boom that was firing on all cylinders during the early 1980s. Many S&Ls lent far more money than was prudent, and in risky ventures which they did not understand.

Soon many of the S&Ls were in way over their head and again their balance sheets started to deteriorate. Deposit insurance did not help. Since Uncle Sam had guaranteed the deposits, this encouraged depositors to ignore the risks of putting cash into weak and failing S&Ls offering above market interest rates.

Then, denial set in. Whereas insolvent banks in the United States were typically detected and shut down quickly by bank regulators, the Congress and the Reagan Administration did not want to accept that there was a problem.They changed the regulatory rules so S&L's would not have to acknowledge insolvency and the regulator would not have to close them down.

However, the mess just kept on growing. Eventually, there was an avalanche of S&L customer defaults. Many S&Ls were soon forced into insolvency proceedings themselves. Then, the good old US government stepped in to clean up the mess. The U.S. government agency Federal Savings and Loan Insurance Corporation, which at the time insured S&L accounts in the same way the FDIC insures commercial bank accounts, then had to repay all the depositors whose money was lost. It was expensive. Around a quarter of S&Ls were bust, and the price tag was $125 billion.

What are the lessons of the S&L crisis? First, lax lending standards lead to big problems. Looking at today’s mess, the growth of all those liar loans and various other exotics are prime examples of poor financial sector supervision. The S&Ls failed because they did not understand the risks associated with the loans they were extending. Does that sound familiar? Putting it more simply, people who can not service loans, should not get them. Supervisors should ensure that banks remember that simple axiom.

Second, when banks mess up, they know that they can count on the government and its big fat checkbook to sort it out. Yes, a taxpayer funded bail out is on its way – make no mistake about that. All those foreclosed loans will generate banking sector losses, which in turn will send many institutions to the wall. However, deposit insurance will then kick in, and the US government will bail the sector out.

So, taxpayers are you ready to be ripped off one more time. No? thought not.

Existing home sales declined by 8.4%, the biggest drop in 17 years.

New homes sales fell by a whopping 17.3%, the largest in 16 years.

Around 35 percent of mortgages were "non-traditional" - i.e.mortgages that allow borrowers to pay only the loan interest or just a part of the interest each month without paying anything on the principal.

.....just putting the numbers in perspective. So, no more happy talk about the US housing market recovering please.

The truth is slowly coming out. When the bubble was raging across the land, everyone thought that it was speculators and flippers who were driving prices up. Now, we are learning that it was something else. True, the flippers and speculators were there, but they could only continue because there were mortgage lenders out there, ready to push the loand that financed the madness. These jokers were pushing mortgages on ill-prepared and naive borrowers like doomsday was almost upon us.

And just how mad did it get? Well, lending standards were so lax that people could get mortgages with monthly payments higher than their monthly income. Presumably, the idea was that the unfortunate borrower could eat into their savings to finance the monthly payments, then sell up and pocket the equity. There was only thing that this scheme required - eternally rising prices. In turn, that required continued lax lending standards.

The Washington Post has an interesting example how the scheme worked:

"Nahid Azimi, who immigrated to the United States from Afghanistan 22 years ago, recently stood in the upstairs hallway of her home in Loudoun County, silently sobbing as she removed the last of her personal items from the $410,000 townhouse in South Riding she bought with pride last summer. She said she was persuaded to buy the house by an Afghan real estate agent she considered a friend and by an Afghan mortgage broker who promised to get her a good loan.

Instead, Azimi, a cashier at Giant who makes $2,400 a month, found herself strapped into a no-down-payment loan with payments of $3,800 a month. She knew it would be impossible to make the payments, but the mortgage broker promised to refinance her loan to make it more affordable. Azimi couldn't qualify for the refinance, however, so she got a second job to try to cover the costs, borrowed money from her friends and tried unsuccessfully to sell the house. Then one day in November, she collapsed at work, in part because of the stress.

"I can't do it anymore," said Azimi, 44, a U.S. citizen. "I cannot afford it, and I don't want them to come one day and put my stuff on the street."

Currently, around 13 percent of sub prime mortgages are experiencing some kind of payments delay. Within a few months, those delinquencies will turn into foreclosures, which will quickly add to housing supply. Not that teh market is short of unsold houses. In most cities, housing inventory is at record highs.

This crash is slow; it is taking its time; but it is getting there. Two things will get us there. Foreclosures, and tighter lending standards.