Blown Mortgage

Financial crisis timeline: how did we get here?

jhammond — Wed, 07 Jan 2009 03:49:35 +0000

In June 2003, the Federal Reserve lowered the prime rate to 1 percent. It was the lowest prime rate in 45 years. It was also the starting point for the financial crisis that has led to hundreds of billions of dollars in bailouts and the demise of investment banks in the U.S., turmoil in emerging markets around the world and a global credit crisis responsible for trillions of dollars in losses. Yet people still ask “How did we get here?”

The University of Iowa (UI) Center for International Finance and Development (UICIFD) has attempted to answer that question by creating a detailed timeline of the events leading up to the economic collapse. The 87-page timeline, which is available in PDF or HTML format at www.uiowa.edu/ifdebook/timeline/timeline1.shtml uses news reports to document struggling investment banks, failing mortgage companies, worsening housing reports, shrinking dividends and earnings, and other factors that were warning of the impending financial collapse. The success of the effort is demonstrated by the popularity of the website which surpasses all other search engine results for credit crisis timeline.

“The timeline is pretty gripping reading for those who have an interest in the worst financial and economic crisis since the Great Depression,” said Enrique Carrasco, a UI law professor and director of Center.

Carrasco started the UICIFD in 1998 to objectively analyze complex global financial and development issues for an audience who are not financial experts.

“Our research is specifically designed for people who aren’t experts in these issues,” agrees HeeJin Lee, a third year law student, one of the UICIFD researchers and its managing editor. “It’s easier to understand than most people think, and this is a way we can present the core of it for people who aren’t financial experts to comprehend.”

The timeline was compiled by Jason Cox, a law student. It follows the economic waves around the globe linking news stories both within and beyond U.S. borders. It includes small stories that may have been missed in the flood of bad news as well as the big headlines. The attempts of other governments and organizations such as the European Union (EU), International Monetary Fund (IMF) and World Bank trying to slow the collapse are also explored.

The financial meltdown is not the first research project for the UICIFD. Past topics include reforming the World Bank and IMF, the economic future of Cuba, the impact of the North American Free Trade Agreement (NAFTA) and China’s relationship with the World Trade Organization. In normal years, the Center’s student researchers spend the bulk of the year working, publishing most of the work on the UICIFD website when it is complete. The students’ research is compiled in an e-book that has grown to more than 300 pages in the past 10 years. The Center is co-hosting a symposium with the law school’s International Law Journal about the global credit crunch and economic crises on February 20 in the Boyd Law Building on the University of Iowa campus in Iowa City.

Someone’s finally starting to tell the truth about the “recession”

constantine — Tue, 06 Jan 2009 16:12:34 +0000

Three cheers for two economists for telling it like it will be.

Harvard’s Kenneth Rogoff and Carmen Reinhart of the University of Maryland have published a paper outlining how long the “recession” will be and what it will entail. Their projections are based on what happened to 22 economies that went through financial crises since 1929.

Conclusions:

Housing downturns last six years — so we’re still at least three years away from bottoming out.
Unemployment increases around 7% after a major financial crisis; hitting its peak four years after the crisis. November jobless numbers 6.7%. That means unemployment will hit at least 13% if that’s where you start measuring from. Also this is based on the tweaked unemployment stats which do not include the under-employed or those no longer collecting benefits.
Stock declines last three and a half years and total 55%. If true, that means DJIA would be under 6500 (which is the number I have in our office pool).
Government debt = 86% of GDP –- or $12 trillion.

(Another fine assessment of the report can be read at the WSJ Real Time Economics blog here.)

All of which sounds a lot more likely than any of the official pronouncements which suggest it turns around by 4Q of 2009.

Q. Were you wrong to be so bullish?

A. I worked for an association promoting housing, and it was my job to represent their interests. If you look at my actual forecasts, the numbers were right in line with most forecasts. The difference was that I put a positive spin on it. It was easy to do during boom times, harder when times weren’t good. I never thought the whole national real estate market would burst.

Q. The NAR’s latest forecast calls for a slight increase in home prices next year. Thoughts?

A. My views are quite different now. I’m pretty bearish and have been for the past year and a half. Home prices will continue to drop. I think we’ll see a very modest recovery in sales activity in 2009. But we’ve still got excess inventories, a bad economy and a credit crunch that will push prices down further, another 5% to 10% more. It’ll take a long time to get back to the peak prices we saw in many markets.

Q. Any regrets?

A. I would not have done anything different. But I was a public spokesman writing about housing having a good future. I was wrong. I have to take responsibility for that.

It is clear that telling the truth and leaving out the spin would have served the NAR better. They could have established themselves as a trustworthy source of information. Instead they lived up to expectation as just another generator of bovine fecal matter. Shame on them.

Constantine von Hoffman, is a veteran business journalist and author of the blog CollateralDamage.biz, a satirical look at marketing and business.

Darwin Didn’t Say Quite What You Thought He Did

MG Dungan — Mon, 05 Jan 2009 11:05:51 +0000

What Darwin actually said was a lot more inspirational considering where we are now. “It is not the strongest of the species that survives, or the most intelligent that survives. It is the one that is the most adaptable to change.” ***sigh, my hero***

Although I have never worked in retail anything, some of my best friends are retail customers and a few have asked for my opinion on others’ advice, most recently Suze Orman’s.

Ms. Orman’s seminal work “The Dangers of doing nothing in 2009″, Costco Connection Magazine January 9, 2009, is now available without charge at the checkout counter. In it she recommends loading up on stocks to be positioned to ride the wave up, which she’s sure is coming, along with the spaceship, I guess.

IMO, her recommendation is irresponsible. However, she’s not alone in advising retail customers to stay in stocks, the large brokerage departments (as you remember, all the big ones went bankrupt, were absorbed by banks, or restructured and became banks themselves to get on-going bailout money) are making the same recommendation for 2009. As a matter of fact, it was their recommendation for 2008 also, which they repeated so persuasively and with such wrong-headed confidence that I’d cringe at their humiliation if I thought they felt any.

Here’s how their advice worked out:

Courtesty of Bloomberg

Caption: After the 1987 crash the Dow finished up about 2% for the year, so 2008 was far, far worse.

We see that the market finished the year up off November lows. This could be due to a bear market rally, the fourth wave up according to Elliott Wave Theory, or some other technical pattern that will correct soon. Or, according to retail brokers and advisers, it’s because the bottom is in and stocks are about to zoom up because . . . because of what? . . . because corporate profits are about to soar. ***that must be it***

Also, note that each time there’s been a substantial uptick, it’s off lower highs.

Apparently, the Fed and Treasury would like to bail out every entity listed on any of the exchanges, including the foreign banks and central banks they’ve been slipping money to under the table. They can’t save them all, for one, and for two, the money they’re giving away has to be paid back at some point. None of this benefits the economy, corporate prospects, or the stock market. After each multi-billion dollar bailout, the stock market stabilizes briefly then resumes its decline. So, stocks will continue trending lower and if prices don’t fall fast enough to reflect reality, the markets will settle things up and crash.

For investors who thought they were well diversified by owning foreign stocks, here’s what happened to their portfolios:

Courtesy of the Wall Street Journal

Whoops, they forgot the Russian stock exchange, which was down 72% and it wasn’t even open every trading day:

Caption: It’s the oil, ??????.

OMG, the humanity. . . I mean, would you look at those skid marks.

This is the worst performance since the first depression and reflects a very unhealthy world economy. There is no beneficial event of sufficient magnitude within the realm of imagination that could turn this around anytime soon.

mg dungan

What We’re Reading 1/4/09

Morgan — Mon, 05 Jan 2009 03:20:25 +0000

A few selections including two massive pieces in the NY Times about the meltdown:

The End of the Financial World as We Know It (NY Times)
How to Repair a Broken Financial World (NY Times)
Madoff Paraphernalia, of All Sorts, Landing on EBay (NY Times)
44 States Face Huge Budget Shortfalls (Global Economic Trend Analysis)
Woefully Misleading Piece on Value at Risk in the New York Times (naked capitalism)

What We’re Reading 1/3/09

Morgan — Sat, 03 Jan 2009 16:33:55 +0000

Here’s some of the interesting articles we’re reading from around the Web:

What’s With All the Auto Dealers (The Big Picture)
Skaters Jump In as Foreclosures Drain the Pool (NY Times via Transistor Blog)
The fall of AIG. (WaPo Pt 1., Pt. 2, Pt. 3)
They saw it coming (The Daily Beast)
Drop in Conforming Limits Means More Jumbo Mortgages (Housing Wire)
Spit When You Say “Madoff” (Slate)

What We’re Reading 1/2/09

Morgan — Fri, 02 Jan 2009 19:46:58 +0000

I love Paul Kedrosky’s daily reading list. So we’re going to try to do that occasionally over here. I go through so much news that obviously I can’t share an opinion on, but it may be something that you would like to read as well.

So thanks Paul and here we go!

Hale “Bonddad” Stewart: The Great Depression, Pt. II (HuffPo)
Video-o-rama: Ring out the old, ring in the new (The Big Picture)
Hybrid Car Sales Fell Sharply in November (Naked Capitalism)
Jacki Zehner: Dear Hank (A Letter to the Departing Treasury Secretary) (HuffPo)
As trade slows, China doesn’t rethink its growth strategy … (Brad Setser, Follow the Money)
The Aftermath of Financial Crises* (Reinhart & Rogoff, PDF)

Let me know how you like this feature and what you’d like to see covered. Happy New Year to you and yours!

Your Tax Dollars Hard at Work

Morgan — Fri, 02 Jan 2009 07:54:54 +0000

I love this stuff. Hat tip to Jeff, who runs the awesome NADA Guides blog (for you gearheads), for sending this in.

Where are your TARP funds going? And they are yours, you know. Those $700 billion will be financed on your behalf for stuff like this, instead of the school, hospital, roads and lower taxes you were probably hoping for.

From Gawker:

Where is the government’s bank-bailout money going? In part to pay for Wall Street banker Peter Kraus’s $37 million Park Avenue spread.

Kraus had excellent timing. He signed on as a top executive at Merrill Lynch in May, negotiating a $50 million pay package, with much of that guaranteed if the company was sold. He didn’t officially start until September. A couple of days later, Merrill CEO John Thain sold the company to Bank of America for $50 billion, triggering a $25 million payout under Kraus’s contract.

Bank of America got a $25 billion capital injection from the government. Kraus resigned and collected his cash, taking a job as CEO of AllianceBernstein, a money-management firm. And then he bought, for an estimated $37 million, an apartment at 720 Park Avenue from Democratic fundraisers Carl Spielvogel and Barbaralee Diamonstein-Spielvogel.

If you haven’t thrown up yet, you can read the rest of it here. Or better check out some of the atrocious interior decorating choices made by the Kraus’s (one below, more in the Gawker article).

Courtesy of Gawker

Now, bankers need bonuses. We need smart people to be incented to work hard to figure this out. However, the people that got us in to this mess should be foregoing any bonuses and rewriting their contracts to take a much more humble salary than what they were used to when they were fleecing investors around the world.

It just amazes me that we can have a bailout package with very little oversight, remember this gem?,

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” — the Treasury Department’s proposed Emergency Economic Stabilization Act, September 2008.

just doling out billions of dollars to the buddies of Hank Paulson and whomever else is a squeeky-enough wheel. A perfect “Why I hate My Industry”.

Captain Obvious: Piggyback mortgages make loan modification harder

Morgan — Thu, 01 Jan 2009 01:27:14 +0000

Bloomberg reports today on Fed findings that state that (OMG!) piggyback mortgages are making it harder for homeowners to modify the terms of their existing first mortgages. No sh&$ Sherlock. Really? This is newsbreaking stuff here. 2nd lien holders who purchased piggyback 2nd mortgages are in a terrible position, althought it may be in their interest to get the first loan modification done, especially in bubble states where they’re basically holding air.

What are Piggyback 2nd Mortgages?

For those of you not overly familiar with the parlance of the early 2000’s housing boom, a piggyback mortgage is a 2nd mortgage used at the time of purchase (or refinancing) so that the first mortgage is kept below 80% of the value of the house to avoid mortgage insurance costs. The 2nd, piggyback mortgage makes up the difference of the financing, usually 100% to make it cheaper to buy (um, borrow) a home from the bank.

These loans were super-popular because it allowed you to either 1) by a home with no money down or 2) refinance and pull cash out of your existing home up to 100% of the property value. Granted you’re now stuck with a huge loan and often with an adjustable rate first loan and a high-interest rate 2nd, but you got the cash and you were happy.

Until things started to get nasty.

Most Piggyback 2nds Aren’t Worth the Paper They’re Printed On

Nowadays, these piggyback 2nds are litterally unsecured debt. Like a credit card. The property values where this type of financing was popular (CA, FL, NV, AZ) have tanked more than 20% in most places rendering the 2nd lien completely unsecured. Because the 2nd lien is subordinate to the first, they have no right to the devalued property ahead of the first lien holder in the event of a default. So they just sit nervously chewing their nails and hoping the monthly payments continue to roll in until the tide starts to rise again. That’s a long time to be biting your nails.

Companies like Wells Fargo, who hold millions of dollars in 2nd mortgages in states like California are very jumpy because these piggyback mortgages are starting to default at alarming rates. More people are figuring out that they’d rather just not pay a loan that is $100,000 more than the value of the home and are walking away.

Piggyback Holders Make Loan Modifications Tough

There are several reasons that piggyback mortgages make loan modifications tough (and short sales for that matter). First, is the overwhelming complexity of trying to get approvals lined up. Most piggyback mortgages are not held by the originating party and therefore the servicing companies have to track down the final holder of the note and get approvals to allow the note to be subordinated to a new first mortgage (the one being modified). If the 2nd mortgage is in some type of security that has been sliced and diced with many investors holding some interest it can be even tougher. Second, as we’ve already covered, the 2nd lien holder is already in a precarious position due to the plummenting house values. And a loan modification request is a sure sign of a borrower in distress which doesn’t bode well for the 2nd lien holder if the market keeps dropping. The 2nd mortgage holder may decide that they’d rather take their chance with a foreclosure now and try to recoup something out of the deal instead of waiting as the housing market continues to tank.

Piggyback Holders May Want to Consider Approving Some Loan Modifications

2nd mortgage holders may consider allowing loan modifications in situations where either they have no options. Such as a home that is completely underwater and they’re left in a position where the note is now basically an unsecured debt. In this instance their only chance at recovering the debt is to give the homeowner the best chance at repaying it. This chance can be improved by allowing the first mortgage to be modified to provide a more manageable monthly payment. (But this is a bit of a pipe dream, since more than half of all modified mortgages are still defaulting.)

Alternatively, if they have a very good security position they may consider allowing a modification because they’d rather make the money on the interest and servicing while knowing that they’ll be compensated to one degree or another in a foreclosure proceeding. (This, again is a bit of a pipe dream because I can’t think of too many areas where properties have appreciated to the point where original 100% financing is now, say, 85-90% of the home value.)

Piggyback Mortgage Holders are Going to Eat It - Big

Wells Fargo and other holders of millions of dollars of second mortgages are going to find themselves taking massive losses on these portfolios over the next several years. With the housing market continuing to tank, the likelihood of cram-downs as a relief tactic increasing, and the job market crashing it is easy to make an argument that most of these 2nd mortgages aren’t worth 10 cents on the dollar.

Not that it won’t be deserved. If you were out there buying up portfolios and pools of piggyback 2nd mortgages with 100% financing to people with 580 credit scores you deserve to eat it. It’s just too bad that the taxpayers will end up paying for your bad decisions too.

Advertisement: Learn how you can do your own loan modification, click here.

The changing face of the American middle-class

jhammond — Wed, 31 Dec 2008 23:25:29 +0000

The current financial crisis affects everyone. No where, however, has the impact been more striking than on the middle-class.

“The gap between the ‘haves’ and the ‘have-nots’ is widening for families with children in the United States,” said Bruce Western, professor of sociology of the Multidisciplinary Program in Inequality and Social Policy at Harvard University. And primary author of a new study exploring income inequalities in the middle class during the past 30 years. “Inequality for these families has grown faster than the combined rates of inequality for all families and for men’s hourly wages.”

Results of the study, “Inequality Among American Families with children 1975-2005” indicate that several factors have contributed to the increasing stratification among the middle class. These factors include the growing income advantage of college graduates and rising number of single-parent households. The effects of these factors were somewhat offset by the the increasing rate of women’s employment and higher educational attainment among parents.

Current economic conditions may be slowing the rising tide of single parent families. A poll conducted by the American Academy of Matrimonial Lawyers (AAML) reveals that the number of divorces actually declines during periods of economic turbulence.

“The reason that the economy has such an enormous impact on divorces is that most people in the middle-income brackets are getting by on whatever income they have. They’re just getting by,” Bonnie Booden, a family law and divorce attorney in Phoenix, AZ told MarketWatch.

Circuit courts across the country are seeing notably fewer divorce and legal separation filings, MarketWatch reports. According to the AAML, more than one-third of members responding to the poll say they typically see a decrease in the number of divorce cases during economic downturns.

This is good news for families, children and the economy in general because the incomes varied the least among two-parent families according to the inequality study. Income inequality was greatest in single-parent families without a working mother. Unfortunately, the gap between high and low income families increased across all family groups during the 30-year period studied. The effect of the economic slowdown on the middle-class is important because it is a large and vibrant middle-class that purchases many of the products and services making up the bulk of the American economy. Without them, the economy continues to struggle and shrink.

“Our research suggests a broad increase in income insecurity that goes beyond low-skill workers and single parents and extends to families from every class,” Western states. “The polarization of family incomes among this generation has implications for the social and economic mobility of future generations and suggest the further erosion of the middle class in in years to come.”

Tax Tips for home buyers, owners and sellers

jhammond — Tue, 30 Dec 2008 17:07:59 +0000

The Internal Revenue Service (IRS) does not have a reputation for being a good guy. In the current crisis, however, the IRS has been one of the few government agencies taking action that actually helps the individual taxpayer. They have provided guidance on the Mortgage Debt Forgiveness Act and expedited the process for removing or subjugating government liens. Now they are reminding taxpayers of two other benefits they may be eligible for that will lessen their 2008 tax burden.

With 2009 only a day a way, the IRS urges taxpayer not to put off preparing their tax files or their year-end tax planning. Among the tax tips to consider are:

First Time Home-buyers Tax Credit – First-time home buyers and those who have not owned a home during the past three years are eligible for a credit equal to 10 percent of the purchase of the home up to $7,500. This new tax credit is only available for a limited time. It applies only to primary homes purchased between April 9, 2008 and June 30, 2009. The credit is fully refundable however, it operates like a no-interest loans which must be repaid over a period of 15 years. Either single taxpayers or married taxpayers filing jointly may claim the credit using IRS Form 5405.

The first-time home buyers tax credit was part of the Housing and Economic Recovery Act of 2008.

Real Estate Tax Deduction – Taxpayers who pay real estate taxes are eligible for this additional standard deduction even if they don’t itemize the deductions when filing their tax returns. Simply Enter the amount of the deduction on Line 6 of Form 1040 Schedule A. The amount of the deduction is equal to the amount paid in real estate taxes up to $500 for a single filer or $1,000 for joint filers. The deduction is available for the 2008 and 2009 tax years, however, to claim the deduction this year you must have paid the real estate tax before January 1, 2009. Claiming this deduction increases your standard deduction.

The real estate tax deduction is especially good news since communities across the country have begun raising real estate and property taxes as a means of increasing revenues. Some communities, like Hoboken, NJ have seen real estate taxes increase almost half over (47 percent) while others such as East Hanover Township, PA saw in change at all. Taxpayers whose real estate and property taxes are paid by their mortgage company pays the taxes. They should receive a statement or receipt indicating the amount of tax assessed and paid. The amount may also be shown on the end-of-year statement provided by the mortgage company for tax purposes.

Tax-free Profits from the Sale of a Home – Under certain conditions, taxpayers who sell their primary homes for more than they initially paid for the home may qualify to exclude all or part of the profits from their taxable income. IRS Publication 523, Selling Your Home, provides the rules and worksheets for determining whether you qualify for the exclusion.

Individual taxpayers can find information on these tax tips as well as others online at the IRS website (www.irs.gov) IRS Publication 17, Your Federal Income Tax, is a comprehensive tax guide for individuals containing more than 900 links in nearly 300 pages. Printed copies of Publication 17 will be available in January 2009.