RANDOM MUSING VII
by Sol Palha
March 22, 2007
To date over 36 Mortgage
lenders have gone out of business and today it looks like
its lights out or close to lights out for New Century the
countries second largest sub prime mortgage lender. For the
past two years we have been warning that certain individuals
who simply did not have the money to put down for a house
should not have been in this market. We also warned that
these creative devilish new mortgages that were being
invented with 0% to 2% teaser interest rates, interest only
and so on were dangerous instruments as it was the
equivalent of telling a child to put out a fire with a can
of gasoline. At that time we stated that the day of
reckoning was 12-24 months away well that day is here today
and its only going to get worse.
Over 50% of the current
foreclosures are coming from the sub prime market. These
individuals bought these houses for little to no money down
in the hopes of jumping on the get rich real estate gravy
train. They were dreaming about locking in gains of 20% plus
a year; fast forward many of these house have lost anywhere
from 10-25% of their values and as envisioned the mortgages
have reset. In some cases payments have jumped as much as
100% and faced with lower prices and mounting new monthly
payment these home owners are simply walking away from their
This problem is slowly
going to trickle over to many of the larger banks; a clear
cut recent example is HSBC. Once again we advise all our
subscribers as we have been faithfully doing now for over 2
years to stay far away from the housing sector. The blood
letting has only just begun.
The stories below quite
clearly illustrate that the worst is yet to come and had
only just barely begun.
New Century on
NEW YORK (Reuters) - New
Century Financial Corp. (NYSE:NEW - news), the largest
independent U.S. subprime mortgage lender, said on Monday
its lenders plan to halt financing, pushing the company
closer to bankruptcy amid dwindling cash and $8.4 billion in
obligations that could come due immediately. New Century's
struggles are part of a wider meltdown among lenders to
less-creditworthy home buyers who are defaulting on
mortgages in increasingly large numbers. The contagion could
spread, roiling a larger section of the U.S. economy while
hitting investors, such as pension funds, which bought
securities backed by suspect home loans, analysts say.
If home prices remain
flat this year and next, mortgage defaults could total $225
billion, creating a real risk of pulling down the broader
housing market and weighing on borrowers with good credit,
Lehman Brothers analysts said in a research note.” Our
expectations of defaults at about 1.5 million to 2 million
units are fairly significant in a soft housing market," the
analysts said recently.
The largest U.S.
mortgage lender, Countrywide Financial Corp. (NYSE:CFC -
news), warned that sub prime turmoil may hurt near-term
profit, sending its stock down 2.7 percent.
While all the experts
were busy ranting and raving that the worst was over (liars
as they lost the ability to tell the truth) we calmly stated
that the worst was yet to come. Believe it or not we are
still not even half way through the cleansing process; there
is a lot more carnage in the works. Now individuals that
should have never even considered buying a house are plagued
with the thought of how are we going to come up with our
monthly payments? The next stage will be when they start
asking the question where are going to live? As far as the
lending institutions go we expect several more of them to
fold and at least 1-3 banks are going to take a massive
beating; one that comes readily to mind is HSBC. The story
below further highlights how the sub prime was nothing but
very stupid investment to get involved in. The punishment
for stupid investments is extreme pain and from a pain
perspective we are just on the paper cut stage and we need
to all the way to the lost a limb or being severely wounded
stage; its safe to say that we still have a long way to go
before things calm down. The story below further
illustrates how rapidly the situation is deteriorating.
Sub Prime Mortgages
The sub prime mortgage
business took another hit as Accredited Home Lenders said it
would have to find new financing after its creditors
demanded more money to cover rising loan defaults.
(Bloomberg) The nation's second largest lender to people
with poor credit -- New Century Financial -- is scrambling
to stay afloat after its banks cut off its financing.
"Connect the dots and it looks like it's a bankruptcy
filing," said analyst Chris Brendler of Stifel Nicolaus. (AP
in Yahoo! Finance) The meltdown could deepen the housing
slump by flooding the market with foreclosed homes and
removing risky borrowers from the pool of buyers. "Every
party has its hangover," said appraiser George Hatch.
Distress continued to
make headlines, putting a personal face on the story.
One tale from a
community worker in San Diego suggests the hardships of
variable rate home loans are affecting more than just those
who have spotty borrowing records.
Andy Sobel had good
credit, a decent job and modest savings, but he needed to
stretch to buy a home in the white-hot San Diego housing
market in 2004.
Three years later, Sobel
has lost his home and his savings, and he faces a big tax
bill as a consequence of a failed subprime mortgage held by
Countrywide Financial Corp. (NYSE:CFC - news), which he said
he should never have been made.
"You never think
that this could happen to you. You feel like an idiot," said
Sobel, 48, who has a doctorate in education. "You fall down
and they stab you."A couple in Massachusetts, Thomas Hilchey
and Robin Crevier, are taking legal action against their
lender, Ameriquest Mortgage Co., accusing it of deceit and
saying its salesman failed to provide documents and
disclosures on the loan required by state and federal
law.Such stories are likely to remain commonplace for some
time to come, say analysts. Still, there is disagreement as
to just how widely beyond the sub prime sector these
problems will extend. Economists see eye to eye on one thing
though: the health of the U.S. economy hinges on an orderly
resolution of the housing debacle.
Ignorance is no excuse
one should always educate oneself when one is about to make
the second most important decision in their lives. We will
talk about the first one sometime next week and we are
pretty sure that most of you will be drawing the wrong
conclusion till then.
It seems that
everyone is getting hit now as greed knows no limits. The
masses never learn from history regardless of whether they
have a high IQ or one that is almost non existent. The key
point here is that the mass mindset refuses to study history
and learn from it. Remember this and drill it into your head
and the heads of your loved ones; never ever buy into
something when everyone thinks its going to go up.
Men hate the individual
whom they call avaricious only because nothing can be gained
1694-1778, French Historian, Writer