|
Home Wreckers
Article By: John Schettler
Two years ago I sampled the net prophets to predict a host of dire consequences in the burgeoning US economy. It seemed then that the amazing boom in the housing market was tailor made
for an equally amazing bust, as these cycles go hand in has as yin is to yang. It was clear to me then, and many others, that the incredible business surge in the housing markets was being artificially stimulated by the low
interest Fed policy set in motion after 9/11. Something had to be done to prop things up for Bush and company, and Greenspan had the solution—cheap money to the American consumer, money to anyone with a
pulse.
The bankers were quick to accommodate and mortgages quadrupled during Greenspan’s term as Fed Chairman. In the space of a few years, hundreds of little loan chop shops began to open their doors to
jump on the lending bandwagon and start collecting those points and fees. Many of these businesses were actually subsidiaries of larger financial institutions, some with well known names, and the rank and file banks also moved
huge chunks of their portfolios into the market, churning out that subprime paper like it was printed on gold foil. Senator Dodd recently stated that lenders had engaged in “unconscionable and deceptive” practices
in this home loan bake sale, but what else is new? If you wanted a house in this market, you could have one—but let’s not just settle for one…how about two or three? Never mind that a huge percentage of buyers
entering this market were unable to put anything near the traditional 20% down on a house. Loans were cut and approved for nothing down, for 120% of the value of the house, for a payment plan that paid back interest only, or
one that adjusted to easy terms for the first year before skyrocketing up. Many buyers found that to have their little slice of the American Dream, (along with $20,000 to $50,000 in extra cash to fix it up and rig up the
necessary appliances, TV sets, stereos and all,) they simply had to sign on to a loan that would actually increase the amount of the principle owed with each payment instead of reducing it.
Consumers took all this free, unearned money and well… they consumed. While it would normally take the average wage earner many years to spend a sum of $50,000, now folks were dumping this kind of
cash into their local economies in a matter of a few months. When the money left over from their new home loan ran out, they were soon encouraged to refinance again, pull out equity that the surge of home
buying had created by inflating house prices, and then dump more money into the economy. And of course this spending was combined with revolving credit card debt to increase the average household debt in America to 130% of income. Americans are now spending 30% more than they earn each year—all
accumulating debt, including over $500 billion in home equity loans, along with 2.43 trillion in revolving credit debt.
 This is how the economy continued running after 9/11, Katrina, and a massive outflow of treasury dollars to
support two wars. If you excluded all this equity cash the real GDP for the last 5 years would only have shown a 1% increase. Real estate also accounted for 40% of the job growth over that same period. In short, the
housing boom carried the US economy, and without it recession is inevitable.
The men who thought all this up knew exactly what they were doing, and who it would impact in the not too distant future (now) when all these questionable loans began to
falter. Let’s call them the “Home Wreckers,” not slinky vamps in tight fitting clothes, but slick loan sharks hiding behind a coat and tie and the
excuse that business is business. The pain that is coming to middle America can be laid at their doorstep as much as anyone else, though they will not likely feel much distress beyond some uncomfortable
testimony before a senate committee. Investigators are starting to take notice, however. March 26 saw the filing of a class-action lawsuit against Beazer Homes of North Carolina. The suit alleges that Beazer
Homes Corp. and its affiliated Beazer Mortgage Corporation conspired to illegally finance unqualified purchasers for newly constructed homes, thus making widespread foreclosure and abnormal property
devaluation inevitable. Beazer is one of many home builders who also jumped on the lending craze. In short, the Home Wreckers are being called into court to account for their misdeeds, and the squawk on
the street is that the FBI, HUD and other government agencies are starting to take a look. Thus far the executive solution to these questionable loan practices was to simply bundle all these bad loans into
securities, and sell them off to investors all over the globe. They had their points and fees up front, along
with a fat commission, and then deftly passed off the liability to others, who bought the “securities” up like
cookies. When these loans fail, the pain will be passed on to the folks holding this dirty paper. As this chart shows, the pain will spread to government accounts, commercial banks, thrifts, credit unions,
insurance companies, pension funds, money market funds, mutual funds, ABS issuers and others.
This was the “Housing Boom” that has been the mainstay of the American economy for the last five
years. Now it is over. The jig is up. Look at these headlines from a recent troll of the net.:
Washington Post: Housing Boom Tied to Massive Increase in Mortgage Fraud
Subprime Mortgage Crisis Could Torpedo 2007 Economy
NY Times: Defaults Rising Beyond Subprime
Top Investor Sees U.S. Property Crash Ahead
Real Estate Prices Will Drop 40-50% in Some Areas
Washington Post: Appraisers Under Pressure to Inflate Home Value
CNN: Buried by Mortgage
Housing: Game Over
Credit counselors overwhelmed by U.S. mortgage crisis
Reuters: Housing "Nightmare" Tarnishing the American Dream
CNN: The Danger of Investing in Subprime Debt
Great Graphs and Charts of the Subprime Mess
Who Gets Hurt if the Meltdown Worsens?
Subprime Lending Worries Hit Home
U.S. Mortgage Defaults Rise Sharply
Why the Subprime Bust Will Spread
Housing Groups Warn of Default "Tsunami"
The Great Unraveling
Walls Closing in On Homeowners
And it would be a mistake to think that these dire warnings apply only to the 20% bottom segment of
the “Subprime” market. The next 50% of all loans made above subprime have seen an enormous infusion of “exotic mortgages,” the notorious option ARMS and interest only loans that are about to cause so
much harm in that larger middle-class loan segment. The 30% at the top sit secure in their 30 year fixed rate loans, mostly wealthy folks who get what they want because they don’t need it. (The best loan rates
go to those who need them the least, while the worst loans are served up to the folks who can least afford them. Isn’t capitalism wonderful?)
But the game is over. The Home Wreckers have long since drifted off to begin building out their
retirement estates. Others continue to wrangle profit from the pain of others with another nifty tactic: hedge fund “style drift,” where investment gurus begin betting on the pain to make even more profits. A TV
News host recently interviewed one such hedge fund manager and asked, “Is there room for the little guy to get in on this profit taking?” The response was that by the time the little guy heard about it in TV
commercials, the opportunity would be long over. Par for the course. The insiders manipulate the game, milk the cow, and invite small investors in at the very end. Call me dumb or just plain silly, but there
should be a law against anyone ever making money by betting a stock or security will go down in value. But where would the rich kids be without their game of puts and calls?
Meanwhile, Bush and Cheney enjoyed the hyper-stimulated benefits of a roaring US economy to finance the enormous drain on the treasury their oil wars created. But the sand in their clock is running out now,
and so is the air in the huge bubble that created hundreds of thousands of new jobs and pumped staggering amounts of money into local economies all across this nation.
The number of people working the runaway real estate market doubled in two short years. Housing values skyrocketed and yuppies began to buy vacation homes and investment property. Shows like “Flip
that House” aired with all the home improvement fare sponsored by Home Depot and Lowes on the Home & Garden TV channel. Companies like Ditech,(GMAC), Green Light Financial, and Lending Tree
dominated the airwaves, (just like the stock trading firms that rolled out all their $9 trade offers on TV during the last boom in the market before the post-Millennium bust.) You can always tell what the latest
scam is by simply watching the commercials on TV. Consumers were depicted as finicky suburbanites with lines of bankers trying to get into their foyer to pitch them a re-fi or new home loan. Web sites
appeared where you could query multiple banks and get multiple offers in a heartbeat—loans approved without proof of income or concern for creditworthiness of the borrower. It was all about points, fees,
commissions and priming the pump.
Now these loans are all going bad, predictably, which is why it was really no feat of prognostication to
lay out what was going to happen as I did two years ago. I had many realtors as clients, and I remember telling them, warning them, that the market was artificially induced, and that it would top out in late 2005
and come tumbling down. Newton called it long ago: what goes up, must come down. Now the news is getting rather grim as the reality of this enormous banking fraud begins to see the light of day in the media
. One of my favorite prophets, James Kunstler, put a lengthy piece on line recently and summarized up the housing market glut and gutter as follows: “The inertia part of the story is that this collective
hallucination (that jive-capital was real) was sustained through 2006 by the sheer massive weight and flow of jive capital and its ability to elude scrutiny by countless chimerical conversions from one abstruse form
to another -- from loan, to bond, to bet, to position, to Christmas bonus. . . . The final result, though, was a nation with an increasingly impoverished middle class, a bankrupt public treasury, and all remaining
wealth (notional or residual) creamed off by a racketeering upper crust of logrolling insiders who, for the moment, could convert their dollars into multiple mansions, private jet planes, and sky boxes at the
gladiatorial combats du jour.”
The sad reality of that statement is only too plain to see in statistics that show the top 5% of Americans
now own 80+% of all the wealth in this country, and that kind of money buys the power to keep the capital flows going their way indefinitely. The rest of us, that vast middle class and the 20% consigned to the
underclass, were kept pacified by all this easy refinance and credit card money, and exhorted to go out and keep the corporations running by consuming everything they churn out. And as for that impoverished
middle class, Cryptogon.com reported: “According to housing experts, anywhere from one to three million Americans may lose their homes this year; another 100,000 people in housing-related industries could be
fired, and an estimated 100 additional subprime mortgage companies may go under. (Some 25, including the nation’s second largest, Home Century, have already gone under since Jan 1 of this year-JS). As
subprime lenders retrench, it will become harder for working-class people to buy a home and, as more people lose their homes, the overall economy could be in danger of a recession.”
That’s putting it lightly. The problem is much worse that it seems, even with all this moping talk about the subprime markets on the stock market news shows. The CEO of Countrywide Credit, the nation’s
number one mortgage lender, told viewers that the $10 trillion real estate industry now faces an unprecedented liquidity crisis. In recent years as much as 40% or more of all loans made were to these
so called “subprime” borrowers, all packaged up in one of those trick mortgages designed to explode a few years hence like well placed IEDs all through suburbia. Now one neighborhood after another will find
these borrowers in distress, and bailing out, their homes in foreclosure. Some simply leave the keys and walk away. They had nothing down on the house, nothing invested, and their equity, long since spent at
Wal-Mart, has now shrunken away or become negative as housing values start their long decline. Foreclosed housing is beginning to penetrate formerly upscale neighborhoods , drilling holes in the
“comps” and dragging down adjacent property values. And you thought Osama was the bad guy out there?
If this industry suffers only a modest 15% decline, it would mean the loss of a trillion dollars in capital,
much of it laid at the doorstep of government institutions like Freddi Mac. 30% is much more likely. Uncle Sam is insuring some $360 billion in loans, with less than $80 billion in reserves to make any of them
good. Senators are already talking legislation, which calls to mind an article I read in Atlantic Monthly some years ago, predicting FEMA trailer offerings to hapless folks who tried to squat on their foreclosed
property as an incentive to get them to move. The specter of shootouts in middle America when the Sheriff came to repossess the homes of millions of families bilked in the loan game, was rather grim.
Mish of globaleconomicanalysis characterized the rough water ahead this way: “The Mortgage Bankers Association said more than 2.1 million Americans with a home loan missed at least one payment
at the end of last year — and the rate of new foreclosures hit a record. The problem is most severe for borrowers with scuffed credit and adjustable-rate mortgages. More than 14% of them were behind on their
payments. And the worst is yet to come…the big wave of ARMs resets has not even occurred yet. That will happen later this year.”
Later this year… mid to late 2007 could be a time of reckoning for all this real-estate and financial
mania. Wall Street was consoling itself recently with news that a big home building company was only reporting a 31% bug out rate—that’s buyers who walked away from a new home deal. When a whopping
third of all your customers walk, and you think it’s good news, delusion reigns supreme.
The bell is already tolling out there, and not just for firms like Toll Brothers. Right now, since it is only
impacting a few stocks and securities, and the people who were the subprime consumers, the pain has yet to be really felt. But it will spread from the housing market, to the financial institutions that perpetrated
this fraud, to the businesses that supplied the rapacious home improvement binge, to the truckers that carried their goods, and then on to the retail companies that sold it all. FedEx is already reporting a
slowdown in deliveries as customers seem to be seeking cheaper alternatives. The economy is starting to show the effects of the strain. Consumers increased purchases using revolving credit in March of 07 by 9
.6%, pushing consumer debt to $2.43 trillion. As gas prices broke through $3.00 per gallon nationwide, pushing up food prices with them, consumers are just doing the all American thing and hitting the plastic.
All this will intensify, deepening in 2008 and 2009.
So if you ask “for whom the bell tolls” when you tune in to Cramer for the latest stock tips in this
emerging bear of a market, and you hear him telling you to sink your money into companies that make oil rigs, listen up and get a clue. The housing bust was an easily predictable, self-inflicted wound. The
damage it will do to families all across this nation will be enormous. Figure homes lost, marriages ruined, jobs lost. It was conceived and executed by wealthy, powerful men for the benefit of other wealthy and
powerful men, to prop up the economy during a time of increasing stress…and they all got wealthier in the process. The backlash to the policies put forward by the Bush administration has already seen the
Republicans lose control of both houses of congress. The fall of the housing sector, and the ramifications that will ripple all through securities, and financial markets, will be the last disaster from the catastrophic
eight years of Bush & Cheney that have taken a wrecking ball to so many other institutions in this country, the US Army, and the constitution to name a few others. By 2008, when the people next exert their will
in the voting booths, the treasury will be near bankrupt, the armed forces broken, the wars of “liberation” lost, the economy a shambles, civil rights in grave jeopardy, security compromised, and the oil crisis it
was all intended to alleviate even worse. The bell will be tolling for you and me by then—for all of us.
So what will the next game be? We’ve gone from the dot com boom and bust, through the millennium
stock market speculation and subsequent crash, to the housing boom and bust cycle that is about swing
into high gear later this year. What’s next? Like Cramer, I’ll put my bet on the energy sectors, not just oil and gas, but the one crucial product they make possible.
In the new world ahead, the difference between civilized society and downright anarchy will be one thing—electricity. The Big oil companies are already positioning themselves to remain the dominant
players in this new world. Cities, states and nations who can keep the lights on and the televisions and computers running will remain viable. An energy crisis could impinge upon our transportation networks,
thin out the traffic on our freeways, and severely limit air movement, but as long as the electricity stays on things will hold together. Large conglomerates are now forming, with deep roots in the soil of big oil, and
they are buying up public utilities, just as they did in California after the rates were deregulated there in the early 1990s. The result in California was soon seen when outside firms, many from Texas before
George launched his bid for the presidency, all began to jack up their price per kilowatt hour to dizzying heights. For the first time in a generation, people experienced periods of “rolling brownouts,” engineered
power outages as the utility companies began crying uncle. The deregulation covered the rates they could be charged for power, but not the rates they could pass on to consumers. There was a power crisis in
California until the state bailed out the utilities and gave them their rate hikes. Crisis, you see, is very profitable, and California was the dry run on what will soon happen to the nation as a whole.
The bottom line in all of this is profit. Corporations and conglomerates are making enormous amounts of money in these harrowing times of energy adversity. You can draw a line from Texas power companies, to
Enron to the Cheney Energy Task force, to 9/11 to the whole seedy war in Iraq to Halliburton moving its HQ to Dubai. Halleluiah! The Home Wreckers were just the domestic front hit men. Their mission was to
keep the nation together in one piece for the 8 years under Bush & Cheney so the “administration” could get its work done overseas and position the US military to control the source of our primary fuel needs.
Now, as that entire enterprise unravels and they begin to lose political control, the whole seedy mess will come tumbling down into the lap of the next president, most likely a democrat. That will be a stormy one
term affair, for certain. Then, in 2012, the energy boys will be back with a vengeance, and a new war horse to ride into the oval office.
Who knows what mask they will be wearing this time? My guess is that it will have something to do with electricity, fuel, and homeland security. The lights will be flickering for sure by 2012. In places where the
lights stay on there will still be a veneer of civility, order, and bearable life. In places where the lights go off
? Take Nigeria for example, a nation of some 140 million people who largely live in the dark. While Nigeria is now the 6th largest producer of oil, all gobbled up and sent to Western nations of course, its people
huddle in the dark each night without electricity, and businesses struggle through days where power outages are the norm, and not the exception. Folks have taken to tapping into oil lines to steal crude, like
mosquitoes feeding off the veins of Big Oil. An anti-government insurgency is slowly growing on the resentment.
Could things like that ever happen here? Google up guys like Dimitri Orlov if you want to know what happens next. I wonder which states will have problems plugging in by 2012--red or blue?
John Schettler: April 2007
|
