Tuesday, March 06, 2007

Are the US Hosung and Mortgage markets Going Belly Up?

Are The US Housing and Mortgage Markets Going Belly Up?

“Mortgage brokers, who make their money on issuing mortgages, not holding them, had been anxious to get as many people as possible to buy mortgages. While old-fashioned bankers would demand large down payments and good credit histories, many mortgage brokers were happy to issue mortgages that they knew buyers could not pay off. Since the brokers dump their mortgages in the secondary market almost immediately after they are issued, they have little reason to be concerned about whether the buyer can actually meet the payments.
Mortgage brokers were able to entice more people into the housing market with low teaser rates' that were often several percentage points below the market rate to which the loan would eventually reset. Many home buyers who could meet their monthly payment on a mortgage with a 1.5 percent interest rate would be hopelessly over their heads when the mortgage reset to a 6.5 percent rate. But, everything was fine, as long as home prices continued their rapid appreciation. If a home buyer's income wasn't high enough to make the mortgage payment, the home buyer could draw on the new equity created by a rising home price. As a result, delinquency and foreclosure rates remained low through 2004 and 2005, even as the number of high-risk mortgages soared.” The Housing Bubble Starts to Burst By Dean Baker http://www.truthout.org/docs_2006/030607J.shtml

Honest economists and analysts have been predicting for years the US housing and lending bubbles were about to burst leaving millions of AmeriKKKans in ever rising debt or experiencing the excruciating pain of losing their homes due to mortgage default and foreclosure. The cause of the crisis are the loose predatory/exploitative lending practices and the pushing of the “AmeriKKKan Dream” of home ownership on people least likely to be able to afford and maintain the expenses of home ownership. Statistics are alarming. Over two million AmeriKKKans now find themselves in some stage of home foreclosure. “WASHINGTON (MarketWatch) -- The number of U.S. homes entering the foreclosure process because of nonpayment on mortgages rose to 130,511 in January, 25% more than in January 2006, according to data released Monday by Realtytrac Inc. The foreclosure rate was one for every 886 U.S. households. The 130,511 foreclosures is the highest monthly total since the firm began tracking national foreclosures two years ago. Foreclosures were up 19% compared with December. With different laws and economic climates, foreclosure rates varied widely among metropolitan areas and states. There were 14,728 foreclosure filings in Texas, but just two in Vermont. Nevada had the highest foreclosure rate, with one foreclosure filing for every 362 households. By contrast, Vermont's two foreclosures amounted to one in every 147,191 households. The remaining top five states for foreclosures were Michigan (one in 366 households), Georgia (one in 372), Colorado (one in 377) and Arizona (one in 526). Jurisdictions with few foreclosures per households included Maine, the District of Columbia, New Hampshire and the Dakotas. Detroit had the highest foreclosure rate among cities: one for every 124 households. Greeley, Colo., had a foreclosure rate of one in 173, while Atlanta had one for every 214. Foreclosures doubled in Detroit and rose by 25% in Atlanta compared with December.” Foreclosures jump 25% in January By Rex Nutting, MarketWatch http://www.marketwatch.com/news/story/foreclosures-jump-25-january/story.
Many of the victims of this escalating economic tsunami are Africans in AmeriKKKa and Latinos, folks how bought into the “dream” of wealth building via home ownership but who did not have the savings, incomes or down payment needed to secure a traditional home mortgage. Unscrupulous mortgage brokers took advantage of these people signing them in what are called sub-prime mortgage loans, loans whose interests rates are lower than the standard rate for a brief period of time but are structured to balloon to exorbitantly higher rates in just a few years. Many were steered towards unconventional or non-traditional loans such as interest only loans where the monthly payments go to the interest only not to principle or no money down loans. Of course the mortgage brokers have an incentive to do this, they get higher commissions on these types of loans. They could care less if the buyer is unable to make the payments two or three years down the road when the interest rates explode.
Homeowners during boom times, when housing prices and appreciation were shooting through the roof, can use the rising equity on their homes like a credit card by borrowing on the increasing equity or by refinancing their loans at lower interest rates to pay their bills and keep their heads above water. But now that the housing market has cooled precipitously, they can no longer use their home as a credit card. This is what we are seeing now as defaults, foreclosures and bankruptcies soar. “Mortgage brokers were able to entice more people into the housing market with low ‘teaser rates’ that were often several percentage points below the market rate to which the loan would eventually reset. Many home buyers who could meet their monthly payment on a mortgage with a 1.5 percent interest rate would be hopelessly over their heads when the mortgage reset to a 6.5 percent rate. But, everything was fine, as long as home prices continued their rapid appreciation. If a home buyer's income wasn't high enough to make the mortgage payment, the home buyer could draw on the new equity created by a rising home price. As a result, delinquency and foreclosure rates remained low through 2004 and 2005, even as the number of high-risk mortgages soared.
However, the party began to end last year as house prices started to fall. The fall thus far has been relatively modest (around 3 percent nationwide), but with prices going in the wrong direction, most new home buyers have no equity that they could rely upon to meet their monthly payments. As a result, delinquency rates began to soar in 2006. More than 10 percent of the subprime adjustable rate mortgages issued last year (the most risky category) were already seriously delinquent or foreclosed within 10 months of issuance. This is even before any of these mortgages reset to a higher interest rate. With foreclosure rates soaring, the music is about to stop. The investors who bought up these mortgages in the secondary market are now refusing to lend more money. Credit is drying up for both the subprime and the Alt-A market, which is a notch above subprime in creditworthiness. These two segments of the housing market together accounted for 40 percent of the mortgages issued in the last two years.” The Housing Bubble Starts to Burst By Dean Baker http://www.truthout.org/docs_2006/030607J.shtml
The party is over not just for home owners who are struggling to hold onto their homes, the party has become a drag for home builders and mortgage companies that specialize in sub prime lending. Huge inventors of unsold homes are piling up. Housing construction has slowed and mortgage companies are going out of business! “NEW YORK (CNNMoney.com) -- Lending to homeowners and buyers without good credit has suddenly become a very bad business - and possibly a very big problem for the U.S. economy as a whole. The sector is known as subprime mortgages, which pumped $640 billion into the economy through facilitating home purchases and refinancings in 2006, according to trade publication Inside B&C Lending. That's nearly twice the level of this kind of lending seen as recently as 2003. But now, with delinquencies and defaults by borrowers rising, experts in the field see more lenders filing for bankruptcy and a sharp pullback in subprime lending. In addition, banking regulators are proposing tougher lending standards and regulations in the sector. All that sent shares of some major financial firms sharply lower Monday. ‘Everyone in the subprime sector this year is going to lose money,’ said Bose George, analyst with Keefe, Bruyette & Woods, a Wall Street firm specializing in banking and finance. ‘They're getting squeezed on all sides. Going into the year, we were looking for a decline of 15 percent [in subprime lending], but clearly now that is far too low. It's now looking like a 25 to 30 [percent] decline.’” Subprime woes: How far, How Wide? http://money.cnn.com/2007/03/05/news/economy/subprime
The yellow alert is flashing brightly. But most are too busy trying to make ends meet to pay attention. Over thirty major mortgage companies have gone belly up in the last few months. This is a ominous sign for the US economy because many of these companies are subsidiaries of larger financial entities. “Last Thursday, Countrywide Financial, one of the nation's largest mortgage lenders, warned that 19 percent of the nonprime loans it collects payments for are delinquent. Its shares slid another 3 percent Monday on concerns about the sector. Other leaders in subprime mortgage lending in the United States are units of some of the nation's biggest financial services firms, including HSBC, the No. 1 subprime lender, which took a $10.6 billion charge for bad loans, as well as General Electric, Wells Fargo and Washington Mutual. And some businesses that aren't generally thought of as subprime mortgage lenders, such as H&R Block and General Motors , also have subsidiaries in that business. One cause of GM's delay in reporting fourth-quarter results is the attempt to look at how changes in the real estate loan market affect the value of GMAC, the financing subsidiary that GM sold a 51 percent stake in during the quarter.” The corporate media will not sound the alarm or tell us the real deal. They are still singing the everything is going great rah rah song. The fact of the matter is, these trends will have a negative ripple effect on the US economy. Record levels of default, foreclosure and bankruptcy hurt the economy. Banks and finance companies lose money, their shareholders become upset, they become gun shy and credit dries up. This in turn hurts new construction, which concomitantly impacts blue collar workers who can no longer pay their mortgages and on and on. Look for our Congress critters to look into the situation later this year. Unfortunately it may be too little to late. They will not be able to save the millions of AmeriKKKans who only wanted a piece of the AmeriKKKan Dream but who are now living an AmeriKKKan nightmare of debt peonage in an increasingly uncertain economy.

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