Mortgage Market Off the Rails, Economy to Follow - Eric Janszen

[FRED]

Mortgage Market Off the Rails, Economy to Follow

Whip Asset Price Deflation Now (WAPDN?)

by Eric Janszen

WAPDN may not have the same "ring" to it as President Gerald Ford's unpopular disco era attempt at populism, his ill-fated "Whip Inflation Now" anti-inflation campaign, but it will work just as well–not at all.

According to WikiPedia:

Whip Inflation Now (WIN) was an attempt to spur a grassroots movement to combat inflation by encouraging personal savings and disciplined spending habits in combination with public measures, urged by U.S. President Gerald Ford. People who supported the mandatory and voluntary measures were encouraged to wear "WIN" buttons, perhaps in hope of evoking in peacetime the kind of solidarity and voluntarism symbolized by the V-campaign during World War II.

Alas, grass roots were no match for the government printing press, and though inflation following Ford's famous "WIN" speech October 8, 1974 declined from an insolent height of 8% to a more respectful 2%, it shot up to an impudent 9% then rose to stand contemptuously at 10% in 1979.

The whole idea seems silly today–because it was. Might such a ludicrous anti-inflation scheme be considered by a U.S. President today? Of course not, but not because Americans are any more wise to monetary principles. Recall post-9/11 speech by President Bush to encourage consumers, formerly known as citizens, to keep spending or else "the terrorists win," in effect, to Whip Deflation Now. That worked because asking Americans to spend more is like asking crack addicts to smoke more. Sure, says the addict. Got more credit crack? Of course we did.

The latest effort by government to engineer money aggregates via government consumer behavioral engineering promotions arrived yesterday in the form of a tiny bailout of a small bit of a subset of the now rapidly collapsing U.S. housing market. This was aimed not so much to keep consumers spending as to keep the Democrats from hogging the populist limelight.

Some day all this direct consumer and voter lobbying will come back to haunt us. All governments propagandize their citizens to support government economic policies, whether to save or not save, usually for decades at a stretch, only to run into economic circumstances that cause the carefully cultivated religious observance of economic policy to backfire.

Take Japan in the 1990s, for instance. Since after WWII, the government demanded citizens sacrifice and hoard, and so they did. Between 1945 and 1990, Japan became the greatest national saver and creditor on earth. The Japanese people's compliance with policy, which is consistent with an anti-debt culture, made Japanese mercantilist economic policy possible. In the early 1990s after the asset price crash and banking crisis, when Japan began to experience goods and services price deflation, the government attempted to reverse decades of propagandizing and get the people out to the malls to spend, spend, spend. Turning Japanese savers into American-style spenders turned out to be as futile as President Ford’s experiment in the U.S. in the 1970s to do the reverse.

Japanese politicians are not greater fans of a market's natural tendency to deliver V-shaped price corrections, preferring an elongated U or, if possible to engineer, an endless string of nominal "_" marks while inflation eats away at the real price the flat line represents on a graph. What the Japanese got for their efforts to manage the collapse of the 1980s asset price hyperinflation was an economy that has see-sawed in and out of recession for going on 20 years while inflation puttered between plus and minus two percent.

The Great Depression was American’s last lesson in the wisdom of saving for a rainy day. For several generations since it’s been bailout city–and nothing teaches spendthrift habits like the moral hazard of repeated, multi-generational debtor bailouts.

Each time recession approaches, the first casualty of U.S. politicians’ refusal to discourage voters’ propensity to borrow and spend is the currency itself, repeatedly thrown under the bus in the name of economic stimulus every time the economy attempts to rid itself of the accumulated excesses of the previous period of economic growth. President Nixon was the first to do so without ceremony, but subsequent administrations have been no less inclined, albeit far less obvious, about it when the need arose.

After spending decades coddling U.S. consumers, I mean, citizens with bailouts that encouraged them to borrow and spend beyond their means, the penultimate was achieved in Q4 2005 when the household savings rate turned negative.

In the midst of decades of government manipulation of markets, the ideology of free-markets blossomed. The apparent paradox can be witnessed on a typical day on Wall Street. While Chip Mason, chief executive and founder of Legg Mason whined Wednesday that the Treasury Department needs to put $20 billion into the planned structured investment vehicles superfund designed to rescue the credit markets from the disaster that Wall Street created by selling over-rated and, thus, over-priced credit products to pension funds from Germany to Florida, a free market for hot dogs thrives on the street below. If hot dog vendors could figure out how to get together, borrow billions, lever it up and bet it on a market whose crash threatens the U.S. economy, that might change. But for how, it’s just one guy’s hot dog’s or another’s.

Airbag Economy

The latest effort to inflate the economic airbags came from the head of U.S. Treasury Department, Secretary Andrew William Mellon, who resigned from his position as the head of the nation’s largest bank to take the position, now serving Republican President Hoover. Oops. Sorry. Wrong post credit bubble era. I meant Treasury Department Secretary Henry Paulson, who resigned from his position as the head of the nation’s largest bank to take the position, now serving Republican President Bush. And, no, today’s credit crisis has not resulted from cascading debt defaults after more than 50% of the nation’s banking resources were committed as margin credit to hyperinflated stock prices through non-transparent cross-investments among investment trusts. One could draw a virtuous comparison to the recent commitment of 60% of loans on the balance sheets of the nation’s banks to mortgage debt backing trillions of dollars of mortgages collateralized by hyperinflated housing prices and funded by risky and over-priced securitized debt instruments, but you have to drawn the line somewhere. We draw it here: we’re much, much smarter today than those dopes back in the 1920s and 1930s. To wit:

"Next to food and clothing, the housing of a nation is its most vital problem. . . . The sentiment for home ownership is embedded in the American heart [of] millions of people who dwell in tenements, apartments and rented rows of solid brick. . . . This aspiration penetrates the heart of our national wellbeing. It makes for happier married life. It makes for better children. It makes for courage to meet the battle of life. . . . There is a wide distinction between homes and mere housing. Those immortal ballads, 'Home, Sweet Home,' 'My Old Kentucky Home' and 'The Little Grey Home in the West' were not written about tenements or apartments. . . . They were written about an individual abode, alive with tender associations of childhood, the family life at the fireside, the free out-of-doors, the independence, the security and the pride in possession of the family's own home. . . . Many of our people must live under other conditions. But they never sing songs about a pile of rent receipts. . . ."

Over these warm words and some 1,900 others like them President Hoover had worked with a full heart for two months. One evening last week he took them all, in the form of a keynote address, to Constitution Hall and there, in a voice brimming with emotion, delivered them to the assembled delegates of the President's Conference on Home Building & Home Ownership. At this great gathering President Hoover again demonstrated his ability and leadership in an unofficial activity outside the constitutional realm of the Presidency.

The conference's major purpose, President Hoover said, was "to stimulate industrial action," not "to set up government in the building of homes." To promote home owning the President urged a better system of home financing, thus keying his program in with his proposed Home Loan Discount system.

Home, Sweet Home, TIME Magazine, December 14, 1931

President's 1931 Home Loan Discount program did not prevent continued national home price declines.

As the current government and Wall Street engineered credit bubble implodes–and as Fed rate cuts, special Fed services at the Discount Window, and the short term goods export boosting effects of currency depreciation start to wear off–this next series of anti-asset price deflation measures, our read of history tells us, will be of a price-fixing variety.

Scooting ahead to a more modern instance of the practice of price fixing, we arrive at the 1960s to find government as unhappy with the political consequences of too high commodity and wage prices as with the political fallout of collapsing asset prices.

President Kennedy in 1962 criticizes the U.S. steel industry for raising
prices. Politicians like markets when they deliver rising asset prices,
but not rising commodity or wage prices. Those are bad.



Governments don’t like markets when they are delivering falling asset
prices, either. That’s bad, too.

Today we have both rising commodity and, soon, rising wage prices combined with falling asset prices. This combination will tax even the most creative politician’s price control measures: how to make Wall Street and Main Street happy at once?

The market solution for the inflation cycle that started around the time of Kennedy’s speech did not appear for another 20 years: stop printing so much goddamn money. It happened under Paul Volcker’s Fed in the early 1980s. Two successive massive recessions destroyed the pricing power of commodity producers and wage earners, wrecked the unions and thereby broke the primary means of transmission of inflation into the price cycle, ushering in the golden age of credit and asset price inflation.

Today, the market solution for falling real estate hyperinflation cycle is equally simple: let prices clear the market. That’ll never happen. Specific policy responses are difficultly guessed at with any certainty. We ask our contacts in the know but it’s apparent that the full scale and extent of the economic problem that confronts us, and them, has yet to dawn fully on the geniuses who created this mess, so they haven’t had a chance–yet–to develop equally ingenious “fixes.” Or if they have, they aren't letting on.

The Housing Crash has not Started Yet

It surprises us that housing prices are falling as quickly as they are so early in the correction process. Our January 2005 forecast notes a greater than 90% correlation between housing prices and employment, and that not until unemployment rises do real estate prices in a bust begin to decline in earnest. Yet here we are with unemployment still below 5% and, according to a reporting of Case-Shiller by Moody’s last week, housing prices fell at a 6.5% annual rate in the 3rd quarter of 2007.

Herb Greenberg at Marketwatch issued a report by Mark Hanson, a 20-year veteran of the mortgage industry, who has spent most of his career in the wholesale and correspondent residential arena. The headlines:

Sub-prime is what is being focused upon to draw attention away from the fact the lenders and Wall Street banks made all loans too easy to attain for everyone.

Sub-prime aren’t the only kind of loans imploding.

We have 90% fewer qualified buyers for five-times the number of homes.

Reinforcing Hanson’s point that the debt crisis is generalized and will therefore be hard to manage, our own real estate expert Sean O’Toole based in California, CEO of ForeclosureRadar.com, tells us that for every home that sold in CA last quarter, one went into foreclosure. At normal sales transaction volumes, current inventory in hard hit areas like San Joaquin County is good for five years’ demand, up from the usual six months’ supply. Of course, sales transaction volumes are far from normal; they are less than half.

To further underscore the breadth of the problem, we note one item stood out in the Fed’s quarterly Flow of Funds report issued Thursday:

Federal Reserve: Home equity falls in 3Q
(AP) Dec. 6, 2007

The amount of equity homeowners hold in their homes slipped in the third quarter to the lowest level on record, just above 50 percent, according to a report from the Federal Reserve Thursday.

In its quarterly U.S. Flow of Funds Accounts, the central bank reported that homeowners' percentage of equity dipped to 50.4 percent from 51.1 percent from the previous quarter. On average, housing is Americans' single largest asset.

Economists expect this figure, equal to the percentage of a home's market value minus mortgage-related debt, to tumble even further as falling home prices eat into equity. It could easily drop below 50 percent by the end of next year, some experts say, marking the first time homeowners will owe more than they own since the Fed started recording the data in 1945.

For the first time since WWII, the average U.S. “homeowner” will own less than half their home. If this comes to pass, and we have no doubt that it will, it’s time to officially shelve the term “homeowner” as under no definition we are aware of does a person have the right to declare ownership of an asset in which he or she does not have a controlling interest.

So much for the “ownership society.”

The desire by Bush and Paulson to put the U.S. mortgage train back on the rails via price-fixing mortgage rates is understandable, but the results will be the same as for any price-fixing operation: economic activity will decline as capital is withdrawn from the markets. A friend of iTulip's we visited in New York City last week, a veteran of Wall Street who started at Chase in the mid 1980s and became a successful hedge fund manager later, asked, If the government can annul contracts between bond issuers and bond buyers, who will want to issue bonds and who will want to buy them? Bloomberg quoted Kenneth Hackel, managing director of fixed-income strategy at RBS Greenwich Capital Markets who explained, “It could end up there's less confidence in the viability in the bond markets and the mortgage markets going forward and it could lead to higher interest rates and higher mortgage rates for everybody.”

In case you are tempted to go around the Treasury Dept. manipulated mortgage bond market and go directly to the source, not so fast. On December 3, the Treasury announced that effective January 1, 2008 the annual purchase limit for savings bonds will be reduced to $5,000 per year from $30,000. Further, our reading is that an individual, as identified by a social security number, cannot purchase more than $20,000 worth of a series (e.g., EE or I) bonds total ever. We’ll keep our eye on changes in TIPs purchasing rules for signs the government may be worried about excessive inflation-indexed bond liabilities as the political pressure to inflate away debt mounts.

Back in 1998 when we were researching iTulip, we were left wondered how the Fed, President Hoover, and Congress managed to botch the government response to the 1930s asset bubble price deflation to the point where the banking system and economy, for all practical purposes, collapsed. It appeared at times that actions were deliberate and coordinated, with rate cuts, tax cuts, and other bailouts. At other times actions seemed to stop. The reaction of the Bank of Japan and Japanese government in the early 1990s also evidenced confusion manifested by flip-flopping and at times contradictory policies, with one hand of government on the print lever and the other on the brakes. We wondered how the U.S. political system was likely to respond to the event, some years off in the future from those heady dot com days, when the U.S. credit bubble and asset hyperinflation had its day of reckoning. Market commentator Doug Noland has tirelessly documented the bubble’s development for over a decade.

After years of wondering, now we are getting our answer.

Inflation is Political

Thousands protest over China ant aphrodisiac scheme
November 21, 2007

BEIJING (Reuters) - Thousands of people in north-eastern China have protested on the streets and surrounded government offices demanding help recovering money from a get-rich-quick scheme to raise ants to make an aphrodisiac tonic.

Hundreds of anti-riot troops and police in Shenyang, capital of Liaoning province, were deployed to stop protesters reaching the provincial government and Communist Party headquarters, residents said on Wednesday.

The investors -- many of them laid-off workers or farmers -- put their savings into Shenyang's Yilishen Group for a scheme in which they raised ants to provide ingredients for a health tonic promising an aphrodisiac boost.

The tonic was promoted on television by Zhao Benshan, the country's best-known comic who specialises in playing innocent bumpkins with a north-eastern twang.

Principles of government response to economic crisis are most clearly demonstrated at the extreme. The example above is what happens when a government creates an expectation on Main Street that the government is there to make them whole after the markets, run by racketeers, make off with their savings. We aren't seeing any U.S. citizens taking to the streets. But as the economic problems intensify in 2008, the stresses will crop show up ever more obviously in the political process and perhaps the crime rate. The squeaky wheels on Wall Street got the first grease, but as the squeaking spreads, so shall the grease.

Our bet has been a similarly elongated and drawn out collapse, in and out of recession, ala Japan since 1992, but with inflation stubbornly in the three to nine percent range, unless outside events invoke a more sudden inflation and get the process over with more expeditiously.

Deciding our long term investment allocations in the mix of these probabilities–a long inflation, a foreign dollar repatriation fueled inflation spike, and the Next Bubbles–in the next cycle will keep us busy for years to come.

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[Spartacus]

Mauldin this week is saying the AAA will not be hard hit

because 50% of the underlying have to default before the contracts allow the AAA tranches to be hit.

He forgets something I've been writing for a LONG time - all credit became too easy, not just sub-prime. The sandpaper (or maybe the cheese grater?) of hard times just rubbed that section of the market raw first. The harder wood / cheese will be slower to show the effects, but they will come.

first, citizens with non-subprime ratings (ie. "good credit") had to get larger loans because housing was overall lifted.

second, many of these, IMHO, also looked at the too-easy credit and decided to go with much more house than they should have.

Herb Greenberg at Marketwatch issued a report by Mark Hanson, a 20-year veteran of the mortgage industry, who has spent most of his career in the wholesale and correspondent residential arena. The headlines:

Sub-prime is what is being focused upon to draw attention away from the fact the lenders and Wall Street banks made all loans too easy to attain for everyone.

Sub-prime aren’t the only kind of loans imploding.

We have 90% fewer qualified buyers for five-times the number of homes.

Reinforcing Hanson’s point that the debt crisis is generalized and will therefore be hard to manage, our own real estate expert Sean O’Toole based in California, CEO of ForeclosureRadar.com, tells us that for every home that sold in CA last quarter, five went into foreclosure. At normal sales transaction volumes, current inventory is good for five years’ demand, up from the usual six months’ supply. Of course, sales transaction volumes are far from normal; they are less than half.

[Jim Nickerson]

Re: Mortgage Market Off the Rails, Economy to Follow

Mortgage Market Off the Rails, Economy to Follow

Whip Asset Price Deflation Now (WAPDN?)

by Eric Janszen
.
.
.

The Housing Crash has not Started Yet

I love it when you write like that, EJ. I hope you are as right as right ever gets.

I want to see blood in the streets, such blood might, just might, wash a lot of the shit out of the system.

Also, I'd like to see you make a lot of money personally on being right with your call for the housing bubble bursting, and I would like to make a few cents too.

It is amazing the BS that seems to move the markets in this country. The seeming dipshit duo of Bush, the seeming idiot, and Paulson, what? a financial genius, can say diddle and someone/everyone interprets it as being the all clear signal for the markets to get in gear again to the upside or, using your word, back on the "rails."

[tree]

Re: Mortgage Market Off the Rails, Economy to Follow

C'mon, Fred. Don't tease us. Was the ant tonic for men, women or both?

[grapejelly]

Re: Mortgage Market Off the Rails, Economy to Follow

the housing problem is a no-equity problem and that isn't going to get better in the short or medium run.

It will get worse because more people without equity will sell and more sales will be forced sales, driving more people into no/negative equity and they in turn will sell.

About 1/3 of people own free and clear. The issue is the other 2/3 -- a high percentage have little or no equity, and as prices fall and even routine recession hits, they will become more forced sale comparables to drive more people into selling or into forced sales.

And of course government response to this problem will make it worse and longer drawn out.

As an investment, real estate isn't yet right. I would say in a year or two. I am betting a tradable bottom in 2009. These things go down longer and deeper than anyone imagines. And right now sentiment, believe it or not, is still too good. Lots of people are "waiting until it improves" and the belief in most places is that "it always goes up in the long run."

I'm not saying real estate doesn't always go up in the long run. Just that when it has hit bottom, we'll know it because people won't be talking this way.

[GRG55]

Re: Mortgage Market Off the Rails, Economy to Follow

Good news travels fast. Even across oceans. This "solution" will sound awfully familiar (not to mention, just plain awful).

What is truly amazing is that some people on social assistance actually get money to help pay their mortgages. Of course if you happen to be one of those unfortunate low income earners who has avoided the dole, your tax dollars are subsidizing someone else to buy a house you can't afford. Ohhh Britannia....

From the FT:

UK owners may be forced to sell homes

By Scheherazade Daneshkhu, Jane Croft and Ellen KelleherSat Dec 8, 5:45 AM ET

Homeowners may be forced to sell next year and join the ranks of renters when lenders tighten terms for borrowers with poor credit histories, the Council of Mortgage Lenders warned yesterday.

Michael Coogan, director-general, urged the government to pledge more money to help those in danger of falling off the housing ladder.

His warning came just days after the Financial Services Authority, the City watchdog, warned mortgage lenders to brace for "very difficult" market conditions next year. Some 1.4m homeowners face a sharp jump in loan repayments - up to 60 per cent in some cases.

Mr Coogan said borrowers with poor credit histories would "find it very difficult and nigh impossible" to get a mortgage.

"Most customers have a stark choice if they don't have a good credit history and can't refinance - they either need to change their spending patterns and batten down the hatches or they take the view that they aren't going to solve the problem and sell and become a tenant at the other extreme," he said.

Mr Coogan said while the number of homeowners forced to sell might be small, he urged the government to help customers facing arrears by addressing shortfalls in state support for mortgage borrowers in difficulty.

Borrowers on some benefits get government help for mortgage interest. But the CML said eligibility for support was too tight and homeowners who have difficulties received less support than tenants.

The Treasury said: "The government is in discussion with the industry about homeowners facing financial difficulties and to identify ways in which lenders may provide support for those experiencing difficulties."

Separately, it emerged yesterday that one of the first intermediaries in the riskier end of the mortgage market was this week forced to call in administrators. The Mortgage Lender, a Hampshire-based mortgage broker, provides mortgages to the subprime end of the market, as well as to upmarket borrowers.

[zoog]

Re: Mortgage Market Off the Rails, Economy to Follow - Eric Janszen

...
In case you are tempted to go around the Treasury Dept. manipulated mortgage bond market and go directly to the source, not so fast. On December 3, the Treasury announced that effective January 1, 2008 the annual purchase limit for savings bonds will be reduced to $5,000 per year from $30,000. Further, our reading is that an individual, as identified by a social security number, cannot purchase more than $20,000 worth of a series (e.g., EE or I) bonds total ever. We’ll keep our eye on changes in TIPs purchasing rules for signs the government may be worried about excessive inflation-indexed bond liabilities as the political pressure to inflate away debt mounts.
...

Sorry to harp on this again, but I really think you are wrong about this $20,000 lifetime limit.

Effective January 1, 2008, the annual (calendar year) purchase limit applying to Series EE and Series I savings bonds is $5,000, issue price, for each series. The limit is applied per Social Security Number (SSN) or Taxpayer Identification Number (TIN). Individuals or entities may purchase up to $5,000 worth of each series in paper form. In addition, individuals can buy up to the same amount of each series in TreasuryDirect online accounts, or a total of $20,000 (issue price) in single ownership form per calendar year.

C'mon guys, I know the government press release and FAQ are about as easy to read as tax form instructions, but nowhere do they use the word "lifetime". You can buy up to $5000 of each series each year, and you can buy multiple series each year, with an annual total of the combined series purchases of up to $20,000. Next year, you can buy another $20,000. And the year after that. And so on.

[stumann]

Re: Mortgage Market Off the Rails, Economy to Follow - Eric Janszen

the snowballing housing crisis is friction between generations - the Baby Boomers have focused the entire economy on themselves and let those who followed be damned.

I was watching Steve McQueen in Bullet a few nights ago - filmed about 69', in San Francisco, and there on the side of a building was "studio apartments for rent, $7.95 a week". Looking back, I figure the average income then was about $10k per year, versus about $50k now - the question is, can you go rent a studio aparment for $40 a week in San Francisco?

from this view, housing prices inflated beyond belief, evidence that the Baby Boomer generation is busy rent collecting off their own children - you know, that pathetic generation stuck either working or living in those private prison complexes, at the cost to the taxpayer of $60k per head per year. No basic health care for the Generation X, but plenty of room/work at the prisons.

But the American electorate is more interested in gay unions or school prayer, so I don't see Baby Boomers having to give up power anytime soon; nor do I see Generation X, nor Generation Zero which follows, offering up much resistance. What I do see is the flood of "developing world" migrants accelerating into the US and Europe, and eventually displacing the Baby Boomers from their rent seeking position at the top of pyramid. The Slackers will remain tenants at the trailer park, the checks to the landlord sent to Dubia.

but the critical mass from immigration is years away, so the financial landscape could continue on towards more unreality before correcting.

[c1ue]

Re: Mortgage Market Off the Rails, Economy to Follow - Eric Janszen

Its going to get worse in California before it gets better.

A lot of people were using living trusts or holding corporations to get around the real property tax basis reassessment when passing on real estate to children via Prop. 58.

http://www.sccgov.org/portal/site/as...0048dc4a92____

The transfer of a principal residence between parents and children, and the transfer of up to one million dollars ($1,000,000) of other real property between parents and children, is excluded from reappraisal under some circumstances. A timely Claim for Reassessment Exclusion for Transfer Between Parent and Child must be filed to receive the exclusion. Transfers of property other than principal residences will be checked State wide for the $1,000,000 limit.

This is an old bill - passed in 1986, but it and its predecessor Prop. 13 will have to fall before affordability will ever return to CA.

This is another reason why prices are so high - those who have lived in CA for more than 15 years are subsidized by everyone newer.

But this only works if there is significant growth in jobs/people. If this dynamic fails, then you end up with a urban ghetto death spiral dynamic replacing it.

[jk]

Re: Mortgage Market Off the Rails, Economy to Follow - Eric Janszen

the best description of the effectiveness of the paulson plan to avoid foreclosures comes from john hussman:

"Think of it as the equivalent of the FEMA response after hurricane Katrina."

[jimmygu3]

Re: Mortgage Market Off the Rails, Economy to Follow - Eric Janszen

For the first time since WWII, the average U.S. “homeowner” will own less than half their home. If this comes to pass, and we have no doubt that it will, it’s time to officially shelve the term “homeowner” as under no definition we are aware of does a person have the right to declare ownership of an asset in which he or she does not have a controlling interest.

Sorry to quibble about details, but a homeowner with 49% or less equity still holds the controlling interest on their property. It's like owning all the stock in a company with a debt-to-equity ratio above 1. You still have full control over the business and/or property, you simply have more debt than equity. Or shall we also shelve the term "stockholder" for those holding equity shares in heavily indebted blue chips like GE, IBM and Boeing, to name a few?

The 50% threshold of US average housing equity is, in itself, not much different than the 51% level. This is because there are myriad different individuals and situations that make up the system. Though the mean is around 50%, median housing equity has been below 50% for a long time.

I am not discounting the importance of declining home equity levels in the US, but I feel the above statement was painting with too wide a brush.

-jimmy "30% Equity" gu3

[FRED]

Re: Mortgage Market Off the Rails, Economy to Follow - Eric Janszen

Sorry to quibble about details, but a homeowner with 49% or less equity still holds the controlling interest on their property. It's like owning all the stock in a company with a debt-to-equity ratio above 1. You still have full control over the business and/or property, you simply have more debt than equity. Or shall we also shelve the term "stockholder" for those holding equity shares in heavily indebted blue chips like GE, IBM and Boeing, to name a few?

The 50% threshold of US average housing equity is, in itself, not much different than the 51% level. This is because there are myriad different individuals and situations that make up the system. Though the mean is around 50%, median housing equity has been below 50% for a long time.

I am not discounting the importance of declining home equity levels in the US, but I feel the above statement was painting with too wide a brush.

-jimmy "30% Equity" gu3

The analogy of shareholder isn't relevant. Try not paying your mortgage for a couple of months and you'll find out soon enough who owns your house no matter how much equity you have. You are a homeowner when you hold title and not until then. As for passing the 50% equity threshold, it means the average mortgage holder is going in the wrong direction, away from holding title and actually becoming homeowners.

[jimmygu3]

Re: Mortgage Market Off the Rails, Economy to Follow - Eric Janszen

The analogy of shareholder isn't relevant. Try not paying your mortgage for a couple of months and you'll find out soon enough who owns your house no matter how much equity you have.

Granted the analogy to shareholders is not a direct match, but when a corporation defaults on its debt, bankruptcy and liqudation of assets is usually not far behind. Then its the holders of debt who get paid, and if there's anything left, the "owners" may get something for their equity.

Conversely, assume you're a lender receiving regular mortgage payments on a 80% LTV loan. Try telling the mortgagee what color to paint the house, or stop by and plant some shrubs without permission or try to evict the occupant or put the house on the market without permission or lay claim to any market gains on the property when the (ahem) owner decides to sell. You'll find out soon enough who owns the house.

When I bought my first house I told my brother "It's my house." He said, "No, it's the bank's house" and I replied, "But it's my ass". FWIW, I put $5k down and walked away from the closing table 3 years later with $80k. Bank's house my ass.

As for passing the 50% equity threshold, it means the average mortgage holder is going in the wrong direction, away from holding title and actually becoming homeowners.

Agreed, though it seems you missed my point. When an individual crosses the threshold, you may say he no longer owns a majority stake in his property. When the mean average goes below 50%, it is simply another reminder that people in general hold less and less equity in their homes. There are already millions of Americans who have less than 50% equity. When the mean crosses below the threshold there will still be millions who hold more than 50%.

[Guest]

Re: Mortgage Market Off the Rails, Economy to Follow - Eric Janszen

Spot on Jimmygu3. The one who carries the risk, who makes sure the debt is serviced year in, year out, who collects the upside or the downside, is the real "owner".

[Christoph von Gamm]

Re: Mortgage Market Off the Rails, Economy to Follow

One of the major reasons to do the price fixing of mortgages is described in the San Francisco Chronicle:

With the re-fixing of the Mortgages, Bankers try to repackage the deals and get away from the "fraudulent" situation because of which they could be sued and then asked to pay back the CDOs. This is according to the SF Chronicle the REAL REAL REAL reason behind the whole interest payment halt.

MORTGAGE MELTDOWN
Interest rate 'freeze' - the real story is fraud
Bankers pay lip service to families while scurrying to avert suits, prison