Links about the credit liquidity crisis

Here are some links:

A Bloomberg article on the Central Bank efforts to stem the "run on the bank."

A Yahoo/AP article - same subject.

Yahoo/Reuters article - same subject, with more focus on foreign Central banks.

What's happening to hedge and bond funds managed by big names on "The Street" as their values collapse and even more investors sell out, including the next big name after Bear Stearns to feel the heat.

Now, for the socialists who stand with me - American Leftist has been doing a bunch of
articles about how this is going to affect those "without," while those "with" can always find new opportunities. His front page is always changing, so I can't link you to specific articles, but he's all about this (and not Iraq, and Defeatocrats, or Fright Wingers, or Neocons.)

Mortgage industry morbid humor

IMPORTANT GUIDELINE CHANGES

Very Important- Guideline Changes Effective August 8, 2007

All borrowers must have one blue eye and one brown eye to qualify.

LTV > 65% SIVA requires minimum credit score of 849.

For all LTV > 65%, 360 months of payment reserves now required.

Borrower's must have no previous bankruptcies in their family history going back
three generations.

A minimum of 25 years self-employment history now required for all NIV Programs (at same location).

Minimum Credit Score for Subprime Loans raised to 720.

All non-arm's length transaction borrowers (mortgage, real estate professionals,
family members) will be required to provide full-documentation, subject to
criminal background checks, wire tapping, strip-searches, and a minimum of 12
hours of interrogation by the Department of Homeland Security.

Please note that these changes will go into effect within the next five minutes. So please lock you existing loan immediately. All existing loans in your pipeline must fund by noon tomorrow.

We apologize for the inconvenience. We realize these are tough times in the mortgage
industry for all of us. Be assured that we have a commitment to remaining strong and
weathering out the storm. We ask for your understanding and cooperation.

"TRANSLATIONS"

These poke fun at the "stated/no income" programs that were made available over the last six years at low credit scores, combined with zero down payments.

The maximum credit score possible is 850.

A credit score of 720 or higher is considered statistically unlikely to ever make a late payment.

SIVA means "Stated income, verified assets." That means we tell them what the income is, but provide no proof, but the assets (money in the bank) is verified with third-party documentation (bank statements, etc.)

LTV means loan to value - anything less than 100% gives you the figure for how much the bank is lending and the difference is what the customer has as a down payment.

Non-arm's length transactions refer to deals where people with direct relationships (family members, business partners, etc.) are the buyer and seller, or borrower and mortgage broker. They are considered very risky, as the relationship bears a great deal of weight in determining what price is going to be paid, as opposed to market forces.

Which building will be our Bastille?

The mass of men lead lives of quiet desperation.

Henry David Thoreau (1817 - 1862), "Walden", 1854

My dad used to say this all the time.

I've been resisting the urge to run around in the street, flapping my arms and yelling "The SKY IS FALLING." Well, only since yesterday.

The Federal Reserve is BUYING mortgage backed securities. Uh .. is this akin to bailing the Titanic with a tin can? I don't know.

I've been sharing this ongoing bit of drama with a few friends, and they (being smart and thoroughly read) people are still having trouble understanding it.

So, here's my down and dirty description of what's happening - I apologize for any misstatements of "economic theory" or mis-attributions. But, basically, this is what's happening:

15:10] Brian : OK, remember, economics are not my forte.
[15:10] DrDivo1: okay
[15:12] Brian : So describe it in terms I can understand
[15:14] DrDivo1: http://www.bloomberg.com/apps/news?pid=20601087&sid=aZ.cxsJa71xg&refer=home
[15:14] DrDivo1: Okay, in terms that anyone should be able to relate to
[15:15] DrDivo1: six years ago, the economy was headed for a serious recession. Bush "won" the election campaigning that it would do so.
[15:15] DrDivo1: He came into office, and seven months later, we had 9/11 and a HUGE pulldown in economic activity.
[15:15] Brian : And GM got it back on track, so to speak, right?
[15:16] DrDivo1: to "prime" our nation's economy, which is 65% consumer spending, the government, through the banking regulators and the Federal Reserve relaxed lending requirements on home equity and home buying.
[15:16] DrDivo1: and they pushed interest rates down from the 6.5% range where they had been to the 5.00% range.
[15:16] DrDivo1: they held those interest rates down there for almost four years
[15:17] Brian : OK
[15:18] DrDivo1: These low interest rates, combined with relaxed credit regulations created a whole range of mortgage loan products that were unprecedented in their liberality and accessability
[15:18] Brian : Such as the interest-only mortgage?
[15:18] DrDivo1: hundreds of thousands of people bought "up" or bought homes that previously would have only been renters
[15:18] DrDivo1: and the low start mortgage payment
[15:18] DrDivo1: 100% financing
[15:18] DrDivo1: etc.
[15:18] Brian : Which aren't necessarily bad, per se.
[15:19] DrDivo1: the broad access to cheap credit also had people buying "investment" property with nothing down
[15:19] Brian : 100% financing is fine...if the person buying has decent credit and isn't buying to the max of what they're able to pay, right?
[15:19] DrDivo1: correct
[15:19] Brian : But people were buying homes beyond what they reasonably could afford.
[15:19] DrDivo1: but, these loans allowed people to borrow up to 55% of their monthly income in payment.
[15:20] Brian : And paying nothing towards the principal on the house, so they were building no equity
[15:20] DrDivo1: since the payments were kept articifically low by low "introductory" rates on adjustable rate mortgages or interest only mortgages ..
[15:20] Brian : On the assumption that the housing prices would go up and up and up and up and up. Right?
[15:20] DrDivo1: everyone was counting on the price appreciation which was based on the reduced cost and easier access to credit
[15:20] DrDivo1: yes
[15:20] Brian : And then people were compounding their debt by borrowing off the increased value of their homes, no?
[15:21] DrDivo1: yes
[15:21] DrDivo1: with which they bought swimming pools, cars, vacations, stocks ..
[15:21] Brian : Even though they had no equity in where they lived, and probably were upside down from the moment they took the keys.
[15:21] DrDivo1: our nation was living on home equity lending and new home sales for the last five years
[15:21] DrDivo1: People could live on what they could borrow on their increased equity in some states/markets
[15:22] Brian : Because houses were undervalued until about five, six years ago
[15:22] DrDivo1: no, house were valued at what they traded for.
[15:22] DrDivo1: Which was based on supply and demand
[15:22] DrDivo1: demand was artificially incented five ish years ago by the wide availability of very cheap credit
[15:22] Brian : But, I mean, some of this growth was fueled by people returning to downtown areas that were abandoned in the 60s
[15:23] DrDivo1: to respond to that increased demand, the home builders created huge tracts of new homes
[15:23] Brian : I remember back in the mid-90s, you could still buy property in DC for five figures, which was too low.
[15:23] DrDivo1: I'd say that so little of that growth was based on regentrification that it was insignificant
[15:23] Brian : And that was what kicked off the housing boom that spread to the suburbs
[15:23] Brian : I'd only say it was significant because it's what kicked off everything else.
[15:24] Brian : Though now, prices within regentrified areas are as out of whack as everywhere else.
[15:24] DrDivo1: the gentrification was based on low property values in those inner city areas, which is natural demand
[15:24] DrDivo1: if not more so
[15:24] DrDivo1: and in those inner city re-developed areas, the price falls are harder
[15:24] Brian : Then the suburbs? Really? Because that would seem to sheild cities like Atlanta and Houston more.
[15:25] Brian : But Atlanta has a repo rate twice the national average
[15:25] DrDivo1: all of the grown in Houston has been in the suburbs
[15:25] Brian : Same in Atlanta
[15:25] Brian : OK, so what happens then?
[15:26] DrDivo1: foreclosed homes start to overtake the natural supply - inventories of unsold homes increases beyond demand (especially now that interest rates have rebounded to near 7%) and prices start to fall
[15:26] DrDivo1: this creates more foreclosures, as people who can't sell or refinance are pressured to let their properties go
[15:27] Brian : OK
[15:28] DrDivo1: until the prices of the real estate fall to a point that those who can buy (usually as investment properties) start to buy, even with 10% or more down payment and interest rates around 8% - when it all balances back out.
[15:28] DrDivo1: Then, people who used to be homeowners and are now foreclosed out become renters again.
[15:28] Brian : OK
[15:29] Brian : And that's, what, 14 million homes right?
[15:29] DrDivo1: the tax base for local governments falls dramatically, as the falling real estate values begins to take down commercial values about 18 - 24 months later.
[15:30] DrDivo1: since raw residential land falls to near zero value, that falls into the commercial side sooner or later, as no land is worth what it was
[15:30] Brian : OK
[15:31] Brian : And then?
[15:32] DrDivo1: and then everything's down lower than it was before. And, for those who have money, a huge buying opportunity is created.
[15:32] DrDivo1: massive wealth transfer is accomplished.
[15:32] Brian : So, rich get richer?
[15:32] DrDivo1: very much so
[15:33] Brian : Since there's no proper taxation to rebalance income?
[15:33] DrDivo1: they got hugely richer by investing in these CBOs and then dumping them when they started to falter months ago
[15:33] DrDivo1: and now, they'll be able to buy up the properties with the money that they made off of developing them in the first place
[15:34] Brian : I see
[15:36] Brian : So, how is this stopped?
[15:36] DrDivo1: I don't know

That was what came before, but it makes more sense to discuss it after:

[14:45] DrDivo1: If I said something about the amount of money the central banks have been pumping into the economy, would it mean anything to you?
[14:46] Brian : Possibly.
[14:46] Brian : I do, you know, read and jonxt.
[14:46] DrDivo1: most people I know do, but this is beyond most of them.
[14:46] DrDivo1: Today, the Fed has put over $38B into the economy; more than $15B of that buy BUYING mortgage backed securities that aren't FNMA grade
[14:47] DrDivo1: Japan put in 9.5B today
[14:47] DrDivo1: dollars
[14:48] Brian : OK...explain
[14:49] DrDivo1: everyone who's invested into CBOs (non Fannie Mae mortgage backed securities) has been slammed - cash calls, increased pricing on their debt, stock declines in the 20 to 70% range.
[14:49] Brian : CBO = ?
[14:49] DrDivo1: all of the banks who have exposure to CBOs
[14:49] DrDivo1: collateralized bond obligation
[14:49] Brian : OK
[14:49] Brian : Go on
[14:49] DrDivo1: all of those banks have pulled ALL the way back on lending to mitigate their potential risk
[14:50] DrDivo1: some bakns are cutting off access to funds for some of their clients who have substnatial positions in CBOs
[14:50] Brian : OK
[14:50] DrDivo1: in Europe, Korean, Canada and here
[14:50] Brian : OK
[14:51] DrDivo1: so, the central banks are throwing money in - which they do by dropping interest rates on loaned liquidity to next to nothing
[14:51] DrDivo1: today, the NY Fed dropped its basic rate.
[14:51] DrDivo1: however, the Fed Funds are trading at a premium to the quoted rate - meaning (as I understand it) that the money is being soaked up faster than it's being released
[14:52] Brian : So...it's like a drought of money needed to keep the mortgage brokers liquid due to all the bad loans they made defaulting?
[14:52] DrDivo1: no
[14:52] Brian : Oh.
[14:52] DrDivo1: much much much higher up the food chain
[14:53] DrDivo1: keeping UBS Paine Webber liquid.
[14:53] DrDivo1: pension funds.
[14:53] DrDivo1: hedge funds.
[14:53] DrDivo1: Bank of America.
[14:53] Brian : Funds and banks that invested in the mortgage companies?
[14:53] DrDivo1: invested in the mortgages. Not the mortgage companies.
[14:53] Brian : How does a hedge fund invest in an individual mortgage?
[14:55] DrDivo1: the mortgages are "bundled" together into a CBO - then, the CBO (with the mortgages as security/collateral) are sold on the stock market
[14:56] Brian : I see
[14:58] Brian : So...these organizations that invested in these CBOs...what's happening to them?
[15:08] DrDivo1: their stock price has been slammed
[15:09] DrDivo1: the organizations that existed primarily to fund/sell these CBOs are basically without value
[15:09] Brian : I see.

So, what's looking more and more probable is that not only will our economy hit the wall, but our currency will devalue significantly. The housing market is SCREWED for two decades or more in the absence of a huge productivity boom (which I think is quite possible.)

I will admit that I, like my father, am so progressive that I'm a near Socialist. I believe that the Bushies put this together to a degree. Well, a BIG degree. After all, Bob Perry (one of the nation's largest home builders) was Bush's original "Pioneer."

But, this loosening of bank regulations put in place during the great depression has been coming on for years - and Bill Clinton was up to his nipples in working with the Gingrich Congress to make it happen. I also admit that I nearly always attribute any tendency of those who have to accumulate more to be at cause.

So, take it for what it's worth, filter out the dogma but this is basically what's going on. Absent our foreign debt, the oil markets, climate change, globalization and so on.

Twenty-four years ago

I stayed home one afternoon from grad school to watch Michael Jackson's "Thriller" video world debut on MTV. It was amazing - it's still very high quality work. I remember hearing that the choreography was .. blah blah .. so complex, etc.



Recently, a prison population in Cebu, Philippines has been quelling the normal boredom and frustration of custodial life by reproducing the entire production. An amateur film of these prisoners playing Michael Jackson and his army of zombie dancers has been one of the most highly watched videos on YouTube ...



Nothing as dramatic as a big drag queen "in trouble."

Of course, the whole thing has passed into the common realm to the point that it's parody:

Thursday night -

I'm watching "Making Love," 1982 - with Harry Hamlin. I haven't seen this since about .. um, 1982.

Funny how it's still apropos for today. Women of the world, if you have a man who's sexually active and is found to be missing from the world from time to time - WATCH THIS MOVIE.

It's only 21:36 and I'm already sleepy. Thank GOD.

Antibes Blue Dreams

Back to the future...

Our saber rattling has pushed Russia into resuming armed long range bomber missions - it's 1968 all over!! GO NEOCONS!

Russian bomber jets resume Cold War sorties - Yahoo! News





Yep. It's Dr. Strangelove! War Day! The Day After!

Who cares about climate change when the Evil Russians are going after us?

Oh, I think that there's a more immediate threat based on our saber rattling habits:

China Threatens to Dump Dollars

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

Here's what's really fun about that - if the Chinese were pushed by our arrogance into making such a choice, yes, they'd be cutting off their noses to spite their faces - BUT - they've got enough trade going to the rest of the world that it could be acceptable.

In our country? USAMERICA!

We'd have the collapse of the dollar on the world market - meaning, that a US Dollar would be worth - say - twenty-five Canadian pennies (stuff coming from Canada would cost four times more) or fifty British pence (ditto) or just over half a Euro.

The real fun would be that everything you buy at Wal-Mart now for cheap would increase in price by the fall of the dollar PLUS the rise in Chinese currency.

I guess that would reverse globalism in a heartbeat when our cost of doing business fell by 400% and we became instantly competitive and profitable again.

Assuming we could keep the lights on.

More of Harvey and some related topics

Do we really need heterosexuals anymore?

Significant to the "joke" is the inherent truth of the argument that, if God or evolution (whichever you subscribe to) didn't WANT us here, all the opportunities in the world have been passed by to get rid of us. We just keep popping into existence.

I look like Al Gore?

It must have just been the expression on my face.

Yesterday, I went to see "SiCKO" with David at the AMC Dunvale. Many of my readers have seen it. Many of my readers would rather cut off a limb and have to sit through an evening at Ben Taub's ER before they'd choose to see the film.

I'm just going to point out two things about the discussion of UHC -

Mark 12:28One of the teachers of the law came and heard them debating. Noticing that Jesus had given them a good answer, he asked him, "Of all the commandments, which is the most important?"

29"The most important one," answered Jesus, "is this: 'Hear, O Israel, the Lord our God, the Lord is one.[e] 30Love the Lord your God with all your heart and with all your soul and with all your mind and with all your strength.'[f] 31The second is this: 'Love your neighbor as yourself.'[g]There is no commandment greater than these."

32"Well said, teacher," the man replied. "You are right in saying that God is one and there is no other but him. 33To love him with all your heart, with all your understanding and with all your strength, and to love your neighbor as yourself is more important than all burnt offerings and sacrifices."

34When Jesus saw that he had answered wisely, he said to him, "You are not far from the kingdom of God." And from then on no one dared ask him any more questions.

“The greatness of a nation and its moral progress can be judged by the way its animals are treated.. I hold that, the more helpless a creature, the more entitled it is to protection by man from the cruelty of man"
-- Mahatma Gandhi (1869 - 1948)

Let all bear in mind that a society is judged not so much by the standards attained by its more affluent and privileged members as by the quality of life which it is able to assure for its weakest members.
~H.E. Javier Perez de Cuellar

The moral test of a government is how it treats those who are at the dawn of life, the children; those who are in the twilight of life, the aged; and those who are in the shadow of life, the sick and the needy, and the handicapped.
~Hubert Humphrey

Watching how France treats their citizens made me sick to my stomach. Watching how Cuban doctors took care of sick Americans for free made me ashamed. Having experienced the uninsured health care system in this country and having had the stress of uncertainty of being able to seek medical treatment, I can say that people who assault the concept of UHC are uninformed and without compassion or feeling for other people.

As we were walking out the the theater, a woman who had seen the movie with us said that I look like Al Gore.

A lovely compliment (in my book,) but not really true. I'd have to drop about 100 pounds, grow three inches, and slick my hair back. However, the moral indignation is there.

Guy thinks I need a radio show on XM, or that I should move to another, more equitable country. Bram's ready to head for France.