Lemme get this right... (sub-prime mortgage stuff)

[radhak]

...we have an 'economic slowdown' and might even be headed for a 'recession' (dreaded word), after all these glorious years, just because some banks went unscrupulously overboard in lending money to people who unscrupulously used that loan to buy houses they should never have aimed for... ?!??

I mean - my understanding had been, stupid-guy-A loans something to stupid-guy-B who can't return it, they are the only ones who should get hurt, right? Why me, the innocent bystander?

2 years ago we bought our first home in a real hot market for real-estate; jumped hoops to collect paperwork; diligently save pennies for the downpayment; even avoided brokers/lenders who seemed to be 'too free' with their money (as in "don't worry, we'll get you any loan upto $1 million" ).

Even after the market went south (in terms of cost), we said we're for the long haul, and it does not matter to us...but now, looks like we might still be affected? Economists are talking gloom, job markets seem tightened, my company is talking less (or no) bonus...

[whine]...it aint fair ...[/whine]

so can somebody explain in nice simple terms - what is the problem? why am i hearing "sub-prime mortgage crisis" even in far-away lands like UK and Europe? Or am i over-worrying?

[LinuxRandal]

Remember Harry Truman's sign on his desk? The buck stops here!?


As a consumer, all bad debt is passed on to the next group in the chain, and eventually winds up out of the consumers pocket.

Our system is based on trust, and consumption. Not savings, and real money (the old gold standard). Hence the name consumers, instead of customers.

[RayintheUK]

.... why am i hearing "sub-prime mortgage crisis" even in far-away lands like UK and Europe? Or am i over-worrying?

We're paying the equivalent of $8.40 for a gallon of fuel at the moment, if that makes you feel any better! House prices are said to be on the way down, inflation is expected to rise next year. All of this is said to be a result of "risky lending," including the US Sub-prime Market.

One of our major banks had a problem, totally un-necessary, fuelled and fanned by the media. They were lending money in an unorthodox manner, but were underwritten by the Bank of England. The Government stepped in and guaranteed all savings (unheard of in my lifetime), yet people still withdrew their money because of media hype.

The bottom line is that mortgages have slowed down, because lenders are finally being more cautious. Slowing down property buying will slightly affect the market - either stabilizing it or depressing it very slightly - but there still is no better investment than property over here. The main danger, as it ever was, is price increases that re glibly blamed on current problems but without a shred of evidece that they're actually connected.

Ray.

[Hellrazor]

1. High oil prices kill companies bottom line with increased costs to do business.

2. The almighty dollar is becoming less and less valuable.

3. Banks gave out loans like candy. So instead of making money on guarenteed loans, they are loosing $$ with foreclosures.

4. The stock market is being hurt by these items.

5. People over extend themselves. New house, 2 new SUV and they have plastic lawn furniture to eat dinner at.

[JR]

In most things economic, the answers are not simple.

IMO, the main problem is that your stupid-guy loanee (the home buyer) defaults on his loan. With enough of those defaults the stupid-guy loaner (mortgage co.) now has a problem. The loaner must keep a specific ratio of assets to loans. As real estate prices have dropped, coupled with the loan defaults, the assets have dropped. So the loaner can't make new loans and may want to unload some of the loans he has on the books.

This affects banks or other institutions overseas, because they are underwriting the mortgages being offered by the loaner. It's a sort of trickle-down thing. The overseas guys are worried about that the loaner is in trouble. But overseas guy can't find a buyer for his portion of the portfolio. Now all the financial guys are getting worried.

The "economic slowdown" mentioned in your first line, though, is a bit of a red herring, IMO. For sure the American economy has been buoyed by escalating real estate values over the last decade. This has meant that consumers have had extra cash available through re-financing. That's changing, obviously.

But now we see that manufacturing is doing very well. John Deere announced excellent results this quarter, due mainly to exports of their heavy equipment. We've seen similar strength from other exporters - networking equip., aircraft, engine mfrs, etc.

So while the consumer-driven portion of the economy is lagging, the producer-driven portion is surging.

There's a whole portion of this discussion that centers around stock market performance, but I'm out of breath.

JR

[cgallery]

The terms of the "deal" the white house is announcing next week are apparently not too favorable to banks. One report I heard on the news today said the banks would be forced to carry loans w/ "unfavorable" (lower interest than they'd like) terms for the long haul.

Of course, they (banks) will try to make this up somewhere and the next bubble will be born.

The real trick is identifying the bubble early, and making some money on it.

[Russianwolf]

Another way this can depress the market is rather simple.

1) Banks tighten lending based on the way things are going now (people defaulting on loans they should have never been given).

2) Builders can't sell the homes they are building as there are now fewer people who can get loans (see 1)

3) Construction workers get laid off as home construction slows (see 2)

4) Loans made to construction workers who could afford their homes are now being defaulted as they have been laid off (see 3)

5) trickle trickle trickle.....

Also,

6) Oil prices rise as demand increases

7) gas prices rise as oil prices rise (see 6)

8) consumer goods prices rise as delivery prices rise ue to fuel cost (see 7)

9) consumer goods prices rise as fuel prices due to increase maunfacturing costs (see 7)

10) consumers have stretch their paychecks further due to increased prices (see 7,8 and 9)

11) families can't support the economy as much as they previously did (see 10)

12) some companies sell fewer goods (see 11)

13) trickle Tickle Trickle

another:

14) corn prices rise as the gov encourage corn based ethanol use

15) farmers who use corn as feed much pay more (see 14)

16) milk prices rise as dairy farmers must charge more (see 15)

17) beef prices rise as cattle ranchers must charge more (see 15)

18) consumers either can't buy beef products or must cut other costs to afford the raise prices (see 16 & 17)

19) Some companies aren't selling as much goods (see 18)

20) companys that sell less must make cuts in labor (see 19)

21) more lay off means more people looking for work (see 20)

22) more people looking for work mean companies can hire at cheaper rates (see 21)

23) cheaper payrolls mean families have less money to support the economy (see 22)

24) trickle trickle trickle

[Black wallnut]

Along the same lines as what Mike is saying.... Ever since gas pump prices topped $2.00 per gallon I have been predicting a recession at the least and likely IMHO a depression. I see more and more on a regular basis events occurring that convince me to keep my point of view. I work in the transportation industry. Even though we recoup some of our fuel costs by collecting fuel surcharges eveything else costs more. Drivers want more money. New truck prices are soaring due to EPA mandates calling for new technology. Freight rates are not increasing to keep up with these added costs. The new technology is not proven and has many failures. Many of the new trucks my company has purchased in the last year has had breakdowns on the road. This lowers our productivity which when added to slimming margins makes increasing wages more difficult.

One of my owner operator's just had an engine problem and needed a rebuild. Even though every bank he asked said "you have great credit" none would loan him the money to pay the repair bill. I think the banks just do not have the money to lend. When small businesses can not borrow needed short term capital the trickle effect can lead to devistation economy wide.

I sure hope my tale of doom and gloom is wrong, but it is not looking good.

[sparkeyjames]

The housing market was fueling a boom in only one sector of the economy. When the Fed raised the interest rates that boom fizzled out. Now the Oil future traders are killing what was left of a booming economy. The foreign trade deficit is the largest it has ever been. Companies are moving the higher paying technical and manufacturing jobs overseas. When the big bust comes the ones who really caused it will be pointing fingers at everyone but themselves. Walmart wins.

[Jeffrey Schronce]

The sub-prime market problem is actually good for the insurance industry in some ways. The vast majority of insurance company reserves are in investment grade mortgages. The problem with the sub-prime market drives up A and B grade mortgages as well due to economic costs to banks. This means investment income for the insurance companies will increase. Of setting this slightly is the rise in fraud, arson, etc that is normally seen during economic down turns.

I certainly am not wishing a recession on the US economy, however it would be very interesting academically to see how the overall market would respond. Our markets and economy have become so robust in dealing with down turns and corrections that it would be interesting to see how severe it a recession would get.

As far as the doom and gloom goes, I believe that is a big picture thing and will happen over many years. I think 50-60 years from now America will look very different on a world economic power perspective and not in a good way.

The banks have plenty of money to lend and that money is still very cheap. He must be looking for preferred rates which he is not going to get for something like a truck repair. Lenders don't like owner operator lending right now as so many guys are defaulting.

[cgallery]

I'm not certain a recession is coming. Sure, the bubbles are gone. But, when bubbles are nonexistent the sheep that chase them will simply spend their disposable income. It may be enough to keep our economy (2/3 consumer-driven) rolling.

[JR]

The foreign trade deficit is the largest it has ever been.

Not true.

The deficit has shrunk from nearly $70B/mo to about $55B/mo. US exports are at their highest level ever.

http://www.census.gov/foreign-trade/...ease/ft900.pdf

JR

[JSCOOK]

Crisis of the U.S. Dollar System

"It's accepted wisdom that the United States, despite recent problems, is still the strongest growth locomotive for the world economy, the pillar of the global system. What if we were to discover that, instead of being the pillar, that the United States was, in fact, the heart of a dysfunctional economic system, which is spreading instability, unemployment, and depression globally? "

This is a very interesting article that is definitely worth a read, particularly since it was written a year ago ...

Crisis of the U.S. Dollar System

[Jeffrey Schronce]

I'm not certain a recession is coming. Sure, the bubbles are gone. But, when bubbles are nonexistent the sheep that chase them will simply spend their disposable income. It may be enough to keep our economy (2/3 consumer-driven) rolling.

And this is where I see the long term problem.

[cgallery]

And this is where I see the long term problem.

You can be a herder, or herdee. But-you-can't-have-one-without-the-other.

[That last part is intended to be sung aloud.]

Problem is, the sheep all want to be herders. And the herders encourage them to keep trying. Yet, the true herders laugh all the way to the stockyard.