New Study Finds Americans Slow to Payoff Mortgage Debt
A few key points from this study:
• Americans tend to put most of their money into checking accounts that earn little to no interest.
• Americans make mortgage payments that statistically go almost entirely to interest. (In the early years of a traditional 30-year mortgage, more than 80% of the total mortgage payments go towards interest.)
• Americans rarely pay more than the minimum monthly mortgage payment required.
• Americans rely on high-interest credit cards in times of financial crisis, rather than taking out a home equity line of credit at a lower interest rate.
A mortgage payoff is something few Americans experience early in life due to the reasons listed above.
Death Spiral Could Lead to a Depression
An article published in Asia Times takes a look at the similarities between the current U.S. economy and the pre-Depression economy
- National policy is currently reasonably neutral, so far avoiding the twin dangers of protectionism and tax increases which caused the medium-sized downturn of 1929-30 to turn into the Great Depression. The problem is concentrated in the property sector. However there are already worrying signs that the magic alchemy of modern finance, through such mechanisms as securitization vehicles whose funding falls apart and complex derivative securities that prove to be unsalable in a crisis, is causing the problem to metastasize.
- The US survived the Great Depression, eventually. However the market recovered only after it had plumbed depths previously thought impossible, at which even the soundest investments were trading far below their true value. After normality returned, the financial services landscape was very different, with many large and apparently solid houses having disappeared, a generation of participants reduced to driving taxis or selling apples and a generation of investors scarred by their losses and unwilling to return to the market. Emergency infusions of money, from the Fed or the taxpayers, generally do no good, only postponing the denouement and delaying the arrival of truly bargain price levels.
Are we in store for another depression? The answer is frightening: it depends. The right combination of wrong decisions can sink the economy into a devastating hole. Or we could luck out, only having to survive a recession. Many in Utah are attempting to do so by use of a Utah Home Equity Loan usage. It’s like waiting for a storm to come. All you can do is watch the forecast and prepare yourself, just in case. It’s interesting to see how Asia consides the nation’s situation.
Fieldstone Mortgage Files For Bankruptcy!
An article published by the Baltimore Sun talks about the Columbia subprime lender Fieldstone Mortgage’s file for bankruptcy. According to the article:
- The company, which has whittled its work force from 1,000 employees to a skeleton crew of 25, reported it had more than $100 million in liabilities and less than that in assets, according to its Chapter 11 filing Friday with the U.S. Bankruptcy Court in Baltimore.
- Fieldstone’s reversal of fortune was abrupt. Founded in 1995, the company originated $5.5 billion in mortgage loans and operated in 50 states and the District of Columbia last year. But by August, the company had stopped originating loans.
- Company officials blamed a sharp increase in delinquent mortgage payments and loan defaults, coupled with margin calls from Wall Street banks and a credit market downturn that limited access to capital.
- Sher said that company officials have not decided whether Fieldstone would be reorganized once the bankruptcy case is resolved.
It is sad to see another lending company fall under the mortgage crisis. And it’s not just the banking giants making the news, it’s the smaller companies. Any company exposed to the second mortgage market is at risk. This just adds to the speculation that the subprime crisis is far from over.
Home Prices Suffer Sharpest Drop in Over Two Decades
An article published by Yahoo! Finance looks at the third quarter drop in home prices and the effects that this could have on the economy. According to the article:
- U.S. home prices fell 4.5 percent in the third quarter from a year earlier, the sharpest drop since Standard & Poor’s began its nationwide housing index in 1987 and another sign that the housing slump is far from over.
- One of the index’s creators also predicted that there’s a significant chance of a recession as the economy contends with falling housing prices, spiking foreclosures and turmoil in the financial markets.
- “We’re in the aftermath of the biggest housing boom in history, so how do we use historical data to judge the outcome?” he said. “We’re out of the range of the normal variation in the data and I take that as very significant.”
- After 13 years of rising home values — with the greatest increases occurring in the first part of this decade — the housing market has started to unravel, spreading from Main Street to Wall Street.
- The Federal Reserve has stepped in, cutting interest rates two consecutive times to 4.5 percent to encourage economic expansion. The Fed said last week it expects the housing slump and credit crisis to slow economic growth and push unemployment up slightly next year.
Seeing as the recently-ended housing boom was the biggest in the history of our nation, it should be no surprise that people predict that we are in the largest housing slump in history. This housing slump could put us into a recession as many fail to payoff mortgage loans, but so far, analysts are not really predicting an economic collapse. The scary thing is that we can only speculate, and we’ll have to wait and see what actually happens.
What’s Left of the Dollar?
An editorial appearing in the political newsletter, Counter Punch, takes a jab at the declining dollar and takes a look at the trouble that its decline will bring. Here is an excerpt from that editorial:
- More than two-thirds of all sovereign foreign exchange holdings are denominated in dollars. When those dollars are converted back into foreign currencies and start recycling into the US; we’re in deep trouble. Inflation will soar. Surely, the Fed must have known this day would come when they were pumping trillions of dollars into subprime mortgages and complex debt-instruments which served no earthly purpose except to fatten the bottom line for rapacious bankers and hedge-fund managers. The Fed also knew that the nation’s wealth was not being “efficiently deployed” for capital improvements on factories, technology or industry. Instead, the money was shoveled into the bottomless sinkhole of stucco homes with composition roofing and toxic credit default swaps.
- Traders see an 82% chance that Bernanke will cut the Fed Fund’s rate by another quarter point to 4.25%. All that is likely to do is put the dollar into free fall and send food, oil and gold prices to the moon. It won’t pay off the overdue mortgage payments and it won’t remove the billions of dollars of debt from the banks’ balance sheets. The US is headed for a “hard landing” and its dragging the rest of the world along with it.
Perhaps this editorial is harsher than it needs to be. The blame can’t all be put on the Federal Reserve and the government, they aren’t the one struggling to pay off mortgage debt. Despite the cynicism and pessimism, there are many good points in this article. The U.S. economy really is in trouble unless we can keep the dollar from falling any further. It’s time we all face the facts and try to find a solution for the financial mess we are now in.
SIV Managers Take Action
An article published by Bloomberg takes a look at MBIA’s recent collapse of its Hudson Thames SIV as bond insurers are feeling the heat. According to the article:
- MBIA Inc., the largest bond insurer, is winding down its structured investment vehicle after failing to find buyers for the SIV’s short-term debt since August, Chief Financial Officer Chuck Chaplin said.
- MBIA has shrunk its Hudson Thames Capital SIV to about $400 million from $2 billion through asset sales to bondholders, Chaplin said.
- SIVs, which borrow short term debt to buy higher yielding assets, are collapsing as contagion from U.S. subprime mortgage defaults drives investors away from asset-backed debt.
- Most banks and asset managers that operate SIVs are working on plans to restructure the companies and don’t expect the business model to survive, Moody’s Investors Service analysts said earlier this month. The New York-based ratings company said today that HSBC’s SIV restructuring doesn’t affect the bank’s credit ratings.
It’s amazing how a company can depend so greatly on the liquidity of the currency and the confidence of the consumer. As soon as these problems arise, any company dealing with credit- (or home equity line of credit loans) companies which usually strive- begin feeling the heat to keep their heads above water. It will be interesting to see how long this crisis lasts, and who will be left when it is over.
Nationwide Drop in Home Prices
An article published by Market Watch takes a look at the falling home prices in every region of the country. According to the article:
- Home prices fell in September in all 20 major cities covered by the Case-Shiller price index, even in cities that had been holding up before the August freeze in mortgage markets, Standard & Poor’s reported.
- For the national Case-Shiller home price index, prices fell 1.7% in the third quarter compared with the second quarter, and were down a record 4.5% in the past year. It was the largest quarter-to-quarter price decline in the 20 years covered by the index.
- For the 20 cities, prices fell a record 4.9% year-over-year. Meanwhile, prices were down 5.5% year-over-year in the original 10-city index, the largest drop in the 10-city index since 1991.
- The last time prices fell so much, it took more than eight years for home prices to return to their peak level.
- “We judge the recent decline in home prices to be the beginning of an extended decline,” wrote Drew Matus, an economist for Lehman Bros., who said prices would probably fall 15% from peak to trough nationally.
It’s no surprise that the housing market has been declining. Still, it can be hard to see the numbers and realize just how badly things are doing. It is good, however, to note that this isn’t the first time the housing market has suffered so badly. It took a while, but the market eventually recovered. We should have no reason to doubt that this will happen again once everyone finds a way to get out of debt. The next few years may be rough, but it won’t be the end of the world.
Mayors Meet to Discuss Foreclosure Woes
An article published by CNN gives details of the latest meeting of the United States Conference of Mayors. According to the article:
- The mortgage meltdown will take a heavy toll on home prices in 2008 with declines expected to average 7 percent across the nation and lost property value of $1.2 trillion, according to the United States Conference of Mayors.
- The organization has representatives from more than 1,100 cities and were meeting to address problems brought on by spikes in foreclosure rates.
- “Today the foreclosure crisis has the potential to break the back of our economy, as well as the backs of millions of American families, if we don’t do something soon,” said USCM President Douglas Palmer, Mayor of Trenton, N.J., in a written statement.
- Municipalities will start to feel the pinch with a decline in the property tax growth rate. Some places could even experience an outright decline in collections. The housing decline will also affect state coffers, as transfer taxes plummet along with home sales volumes.
I’m not sure how productive this meeting was. Sure it’s a good thing to discuss concerns about current issues, but it should lead to ideas for solutions. We don’t need our elected officials to sit around and share their complaints and woes. What they, and everybody else should be doing is working to find solutions. We may not be able to stop the credit crisis dead in its tracks, but we can try to curb its effects. We should be spending our time and energy figuring out how to do that, not just vocalizing our fears. One creative idea for solving a debt problem is to take out a 2nd mortgage.
OPEC Members Seek a New Cash Reserve
An article in the LA Times takes a look at OPEC’s dissatisfaction with the declining U.S. dollar that may lead to a conversion of cash reserves to another currency. According to the article:
- Iranian President Mahmoud Ahmadinejad said Sunday that OPEC’s members have expressed interest in converting their cash reserves into a currency other than the depreciating U.S. dollar, which he called a “worthless piece of paper.”
- “They get our oil and give us a worthless piece of paper,” Ahmadinejad told reporters after the close of the summit in the Saudi capital of Riyadh. He blamed President Bush’s policies for the decline of the dollar and its negative effect on other countries.
Oil is priced in U.S. dollars on the world market, and the currency’s depreciation has concerned oil producers because it has contributed to rising crude prices and eroded the value of their dollar reserves.
“All participating leaders showed an interest in changing their hard currency reserves to a credible hard currency,” Ahmadinejad said. “Some said producing countries should designate a single hard currency aside from the U.S. dollar . . . to form the basis of our oil trade.”
- Venezuelan President Hugo Chavez echoed this sentiment Sunday on the sidelines of the summit, saying, “The empire of the dollar has to end.”
“Don’t you see how the dollar has been in free-fall without a parachute?” Chavez said, calling the euro a better option.
Now there are several ways you can react to news like this. You can team up with the chauvinists and blindly defend the honor of the falling dollar, taking any negative comment about the U.S. dollar as a personal insult against the United States. Or you can accept that they have a point; the dollar is losing its worth. Let me put it this way: the U.S. dollar is falling. We can try to drag everyone down with us and cause a worldwide collapse. Or we can do our best to stabilize the economy and, in the worst case scenario, graciously accept the help of other nations when our dollar falls through. Utahns are seeking their own source of cash reserves by using Utah home equity loans.
Countrywide Denies Speculation of Bankruptcy
An article published by CNN takes a look at Countrywide’s claims that it has ample capital and liquidity to stay in business. According to the article:
- “Countrywide Bank, the Company’s primary operating entity, has sufficient liquidity available to meet its projected operating and growth needs and has accumulated significant contingent liquidity in response to evolving market conditions,” the firm said in a statement.
- Earlier Tuesday a Countrywide representative told The Wall Street Journal that speculation the company may file for bankruptcy is “absolutely false.”
- Countrywide said it has $35.4 billion in reliable liquidity available at Oct. 31, up from $33.6 billion available in September.
- A securities analyst suggested that problems at Freddie Mac (FRE) and Fannie Mae (FNM) could cut off liquidity for Countrywide and downgraded the shares.
- “Countrywide’s survival strategy has depended on access to the secondary markets through GSE purchase and re-securitization. That strategy is less viable in an atmosphere where the GSEs themselves are capital constrained and may need to shrink,” Fox-Pitt, Kelton analyst Howard Shapiro wrote on Tuesday.
If the stability of the company is dependent on a market that may prove as volatile as the current mortgage industry, that doesn’t offer much reason for investors to be confident. Countrywide may very well be able to keep its head above water so long as the second mortgage markets don’t crash. But it’s still a risk that many investors may not be willing to take.