Scary thought of the day

August 8, 2007 – 9:38 am

Marc Ambinder catches this:

In case you missed it, Chuck said on MSNBC earlier that Bill Clinton, in private conversations, has said that he couldn’t win the Democratic nomination in this environment; the party had shifted to the left on trade

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Cramer blew up; Listen to what he said

August 6, 2007 – 3:32 pm

Cramer blew up on CNBC. It’s on Drudge. Blah blah blah. Read what he actually said. And think about what that will mean politically:

No, we have Armageddon. We have Armageddon …

Will somebody come on TV and tell people how bad it is. …

We have thousands of people losing their homes right now. 14m people took a mortgage in the last three years. 7m of them took teaser rates or took piggy-back rates.  They will lose their homes. …

It really is going to be bad. Really bad.

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When Bernancke says it’s bad, you know you are in trouble

July 26, 2007 – 12:12 pm

FT has a story about some of the problems:

Ben Bernanke, Federal Reserve chairman, said last week that the central bank now thinks the economy will not return to close to its trend rate of growth until some time into next year. Earlier on, policymakers had talked about a return to close to trend by the final quarters of this year.

An analyst is quoted in a front-page WaPo story a little bit more clearly:

"When people get scared, they tighten up all over," said A. Gary Shilling, president of the investment firm that bears his name. He said he expects housing prices to fall significantly further. "This kills consumer spending," he said of the credit crunch. "We think we’ll be in a recession as a result by the end of the year. And that will spread globally because U.S. consumers still are the buyers of first and last resort for the excess goods and services produced around the world."

Oy. And awareness of these is a lagging indicator.

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More on the 2008 environment: Iraq and the economy

July 2, 2007 – 9:24 am

This morning, Novak said:

It is difficult to exaggerate the pessimism about the immediate political future voiced by Republicans in Congress when not on the record. With an unpopular president waging an unpopular war, they foresee electoral catastrophe in 2008, with Democratic gains in both the House and Senate and Hillary Clinton in the White House.

There are a bunch of reasons for this. But let’s put the housing stuff in context. We are at the very beginning of the crunch. Here is when the adjustable rate mortgages reset:


In other words, over the next several months there will be a sharp increase in the number for foreclosures and it will not calm down until late 2008 or early 2009.

My expectation is that this will be the largest general election issue in swing states out west and in Florida. And it will emphasize the importance of issues linked to economic insecurity like health care. Especially if we begin to pull out of Iraq in September. After all both Hillary Clinton and Barack Obama legislative staffers admit that their plans would result in 100k military in Iraq for the medium term.

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More on the housing bust

July 2, 2007 – 9:06 am

From Bloomberg this morning in a story about the collapse of the housing market in Georgia, you can see the macro situation:

Bear Stearns, the second-biggest U.S. underwriter of mortgage-backed securities now reeling from the worst housing decline since the 1930s, never planned to take possession of the three-bedroom house. …

The lender was Meritage Mortgage Corp., one of more than 60 subprime home loan companies that have halted operations, gone bankrupt or sought buyers since the start of 2006, according to data compiled by Bloomberg. Bear Stearns had bought the mortgage from Meritage at a discount. …

Countrywide Financial Corp., the largest U.S. mortgage lender, said it had $110.1 million of foreclosed real estate at the end of March, quadruple the $27.4 million it held three months earlier.

From last week’s WSJ, here’s a little bit of micro:

Steven Schwaber, a bankruptcy attorney in the Pasadena, Calif., area, says he’s getting more calls from small-business owners who had refinanced into ARMs, tapping their equity in an effort to keep their businesses afloat. "All of the sudden their budgets are out of whack because their house payment went up by 25% or 30%," he says, at the same time fuel prices are rising. Some would have wound up filing for bankruptcy anyway, he adds, but rising interest rates have pushed others over the edge.

For my fellow Republicans reading this, this should be a big wakeup:

Many borrowers who run into trouble have relatively low incomes or scuffed credit records. But housing counselors say they are also hearing from a growing number of middle- and upper-middle-income borrowers who borrowed heavily to finance spending or buy a house they could barely afford. NeighborWorks Homeownership Center in Sacramento, Calif., says that 38% of the borrowers it’s seen this year have "moderate or above-moderate" incomes, up from 24% last year.

In Illinois, the new crop of borrowers includes people with bills for private schools, fancy cars and child care and monthly incomes of $3,500 to $10,000, says Michael van Zalingen, director of homeownership services at Neighborhood Housing Services of Chicago. Many of these borrowers took out loans that didn’t require them to document their income and overstated their earnings, he adds.

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The economy: The big unknown in 2008

June 28, 2007 – 5:14 am

If I sit back and worry about what could happen in 2008, I don’t worry about Iraq. I worry about the economy. Here is why, courtesy of the NYT:

In the coming year, interest rates on some $850 billion in mortgages are scheduled for their first increase. Over half of that is in subprime loans. That is the dangerous financial world we live in.

While I am not sure that I agree with their solution, they certainly get the problem right:

Until now, the deepest pain of the housing slump has been felt by hard-pressed borrowers, generally low-income homeowners stuck with unsuitable and even predatory subprime loans — adjustable-rate mortgages made to people with weak credit. As monthly payments have increased, the loans have become unaffordable, while falling housing prices and tougher credit terms have made them harder to refinance. Defaults and foreclosures have multiplied, but Congress has provided scant relief.

But now the pain is being felt by Wall Street. The two big Bear Stearns hedge funds that neared collapse last week were full of tricky investments tied to subprime mortgages. To try to ensure that hundreds of billions of dollars worth of similar investments don’t also plummet, endangering the financial system, Congress may finally have to do more to help lower-end borrowers. That, in turn, would prop up the investments based on their mortgages.

Let’s just be clear how bad this is. From MSNBC:

The number of residential mortgages going into foreclosure hit a record in the first quarter of the year, with the biggest increases coming in the so-called "subprime" market of borrowers with weaker credit histories. Foreclosure rates were highest in a handful of states where home prices and sales surged during the boom, including California, Florida, Nevada and Arizona.

Two early primary states. How bad?

A separate report this week by RealtyTrac reported that foreclosures for May were up 19 percent from April and up nearly 90 percent from May 2006. In Nevada, there was one foreclosure filing for every 166 households last month, nearly four times the national average and the highest rate in the country for the fifth month in a row, according to RealtyTrac.

Just to complete the loop. In Nevada, in one month, about .7% of the households lost their homes. If that rate were to stay flat across the year, (not really a realistic assumption) around 9% of the electorate would lose their homes. And the May number was a 19% increase over the previous month. And, from the NYT piece,  interest rates on nearly $500b in adjustable rate mortgage will increase sharply over the next year. And, the impact of this is magnified through the structure of the hedge fund industry, including, possibly, into other segments of the mortgage market.

In other words, it is likely that the foreclosure rate will accelerate. It will hit two very politically sensitive states. Add in Arizona and, possibly, New Mexico and Colorado, in which real estate is booming. You have 5 swing states, totaling 56 electoral votes that could be in real economic turmoil.

What is the economic and political plan to address this?

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