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I always wondered how the folks at work afforded the endless parade of new cars gleaming in the parking area. I worked with all of them, there hadn't been any change in the payscale, nor widespread promotional opportunity - yet it seemed that everytime I walked out to my vehicle, someone was showing their co-workers some form of Lexus, Nexus, or Excess..
I park my five year old truck downwind of everyone else, it's the "Fish Mobile" and I'd rather not offend the office crowd - basking in new car smell is the only real pleasurable experience in all that fine print, and the exercise does me good.
I was curious, as the majority were of the two seater "Adrenal Rocket" model, I ascribed it to "mid life crisis," but I was pondering the wrong question, what I should've wondered is, "..how in bloody hell are they going to pay for it?"
I found the answer, likely many of you knew it already, it's not to my liking.
The 'second mortgage implosion', 'Pay-Option implosion' and 'Hybrid Intermediate-term ARM implosion' are all happening simultaneously and about to heat up drastically. Second mortgage liens were done by nearly every large bank in the nation and really heated up in 2005, as first mortgage rates started rising and nobody could benefit from refinancing. This was a way to keep the mortgage money flowing. Second mortgages to 100% of the homes value with no income or asset documentation were among the best sellers at CITI, Wells, WAMU, Chase, National City and Countrywide. We now know these are worthless especially since values have indeed dropped and those who maxed out their liens with a 100% purchase or refi of a second now owe much more than their property is worth.
Herb Greenberg wrote a phenomenal article on what we saw firsthand, while the government bailout is geared to assist the primary mortgage, many of the folks have an adjustable rate second mortgage that'll be just as damaging. Lenders were every bit as clever on "home equity lines of credit" and second ARM's - and with the large declines in value, many are upside down on the second already.
Make no mistake, this CDO mortgage mess is not behind us, and as the article points out:
One final thought. How can any of this get repaired unless home values stabilize? And how will that happen? In Northern California, a household income of $90,000 per year could legitimately pay the minimum monthly payment on an Option ARM on a million home for the past several years. Most Option ARMs allowed zero to 5% down. Therefore, given the average income of the Bay Area, most families could buy that million dollar home. A home seller had a vast pool of available buyers.
Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible .
This leaves ample room for home prices to fall much further, which means more folks "upside down" on both their first and second mortgages. Take the time to read the article and some of the comments that follow, many are from mortgage industry insiders (as is the article itself) and the consensus is not pretty.
Financial shorts will likely be a constant in my portfolio for the duration, I'm not inherently a bad person, I just know the sub-prime issue has not been solved, and when the casual investor gets the news, he'll be reluctant to invest in financial institutions of any kind.
I don't like betting on calamity, but this contest has taught me it's akin to childhood spinach; Ma puts in on your plate - you're eyeballing the pie cooling on the sideboard and know you have clean your plate. The nutrition content is immaterial, as healthy is lost on you, the pie is the goal, and you'll endure the gag reflex to get some.
For me the "pie" is education, investment smarts - the kind that stays with you. It appears a lot of us will be getting an education, for many it'll be personal misfortune and their pain will be shared by all of us - I would that it were otherwise but I think it'll teach us a thing or two.
For us middle aged types it's the lesson our parents attempted to instill in us, as they'd lived through the Great Depression; "Save your money for a rainy day" - we thought it antiquated or old fashioned, and what's coming is likely less dire but you may find yourself sounding "old fashioned" when you mention this period to your kids.
KB
http://singlebarbed.com
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