A Look In The Brief Past: This Could Be Worse Than Enron – Is It Too Late To Get Out Of The Housing Bubble?
August 12th, 2023 by MG
As we move deeper into the abyss of the housing bubble, we often try to remember what things were like just a few months ago, or a year ago. Back in April of 2007, in an article titled “US Housing Bubble Meltdown: ‘Is it too late to get out’?“, we’re given a brief look into what was expected to be the future.
Does it sound too far off from what’s happening?
Schumer’s right. The repercussions of millions of homeowners defaulting on their loans could be a major hit for Wall Street and the banking sector. That’s what Schumer is worried about — not the plight of over-leveraged homeowners.
Every day now, another major lending institution unveils its plan for bailing out the housing market. Citigroup and Bank of America have joined forces to create the Neighborhood Assistance Corporation of America which will provide $1 billion for the rescue of subprime loans. This will allow homeowners to refinance their mortgages and keep them out of foreclosure. The new “30- year loans will carry a fixed interest rate one point below the prime rate, putting it currently at 5.5 percent. There are no fees, and the banks pay all the closing costs.”
But why are the banks being so generous if, as Paulson says, “the housing market is at or near the bottom.” This proves that the Treasury Secretary is full of malarkey and that the problem is much bigger than he’s letting on.
Last week, Washington Mutual announced a $2 billion program to slow foreclosures (Washington Mutual’s subprime segment lost $164 million in the first quarter) while Freddie Mac committed a whopping $20 billion to the same goal. In fact, Freddie Mac announced that it “would stretch the loan term to a maximum of 40 years from the current 30-year limit.”
40 years!? How about a 60 or 80 year mortgage?
Can you sense the desperation? And yet, Paulson says he doesn’t see the subprime meltdown as a “serious problem”?!?
We covered some opinions about a federal bailout of the housing market in this housing bubble, and it seems that it would be a prudent idea to reiterate exactly how large this problem is. Throwing money at the problem without investigating and working to prevent the core issues from ever happening again is going to make the War On Housing as effective as The War On Terror or The War On Drugs:
Unfortunately, the problem won’t be “fixed” with a $30 or $40 billion bailout scheme. The problem is much bigger than that. There is an estimated $2.5 trillion in subprimes and Alt-A loans — 20% of which are expected enter foreclosure in the next few years. Any up-tick in interest rates or unemployment will only aggravate the situation.
“There’s a $1.5 trillion in subprimes and $1 trillion in Alt-A the catalyst will be declining house prices which is already underway. But as we get a large amount of these $2.5 trillion mortgages go into default, we’ll see foreclosed houses dumped on an already weak market where homebuilders are already struggling to sell there houses. The price declines which have started will continue and may even accelerate in some of the hotter markets. I would expect that housing prices in “2007 will decline 20% in a lot of markets”.
“What you are going to see is the greatest price decline in housing since the Great Depression…..The one thing that people should not do, is go near a CDO or a residential mortgage backed security rated Triple A by Moody’s and S&P because these are going to get down-graded by the hundreds of millions — because they are secured by subprime and Alt-A mortgages where there’ll be massive defaults”.
Will the losses in this housing bubble exceed those of the S&L crisis?
Heebner: “They’re going to dwarf those losses because the losses could easily approach $1 trillion — that dwarfs anything that has ever happened. Enron was $100 billion — this will be far greater than that…..The good news is that most of these loans are owned by Hedge Funds…You hedge funds buying these subprime and Alt-A loans and leveraging them at 10 to 1. They buy a pool of mortgages at 8% and they borrow against it in yen for 3% and then lever it at 10 to 1so you have a lucrative profit And the hedge fund you are running, the manager is going to get 20% of the gain — so even if it’s a year before you go broke; you get rich until the fund is shut down”.
Back in April we hadn’t yet seen Jim Cramer explode telling owners to “Walk Away” from their homes if they grew toxic. We also hadn’t yet experienced 200+ percent growth in the number of foreclosure notices spreading around communities. While I believe the below estimate is a tad harsh, it is at least fairly accurate. April was barely a few months away, but so much has already happened in such little time.
Falling home prices have already precipitated a number of other problems. For example, Gene Sperling reports in “Housing Bust Meets the Equity Blues” that “The Fed data showed an amazing expansion (in Mortgage-Equity Withdrawal). In 1995, active MEW had been $37 billion. By the fourth quarter of 2005, it soared to $532 billion annualized, a 14-fold expansion”. These equity withdrawals have translated into consumer spending which accounts for at least 1 full percentage point of GDP. Declining house prices means that extra boast for the economy will now disappear.
Foreclosures are soaring and expected to get worse for the next two years at least. In California foreclosure filings jumped 79% in March alone. Other “hot markets” are reporting similar figures.
The glut of houses on the market has slowed sales for the nation’s major homebuilders — most are reporting that profits are down by 40% or more.
We can expect to see an erosion of confidence in the market, a rise in inventory, and a steady increase in defaults. More and more people will walk away from their homes rather than be hand-cuffed to an asset that loses value every day. This could transform a “housing correction” into a nation-wide financial calamity.
Many peoples’ futures are linked directly to the “anticipated” value of their homes. It is impossible to determine how shocked they’ll be when prices retreat and equity shrivels. The housing flame-out has all the makings of a national trauma—another violent jolt to the fragile American psyche.
So far, we’re still in the first phase of a process that will probably play out for 10 years or more. (Judging by Japan’s decades-long decline) None of the bailout plans are large enough to make any quantifiable difference. The numbers are just too big.
Housing prices are coming down and the real estate market will return to fundamentals. That much is certain. The law of gravity can only be ignored for so long.
Just don’t count on a “soft landing”.
So with builder inventory stacking up, home sale percentages dipping, and sellers scared and unsure of where to go next, what will the next few months hold? Well if we’re to “Stay The Course“, I’d predict that we’re going to see more of the same, with slightly larger numbers.
Buoyancy in the market is important here. While one area such as Subprime and Alt-A dip, it barely sets the momentum for the wave that will crash into another sector or facet of the housing bubble.
We’ll be staying tuned!
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