June 23, 2006

Could the banking system be on the verge of failure?


The Great Depression saw typically leveraged margin accounts go bad, leading to a long series of consequences. The Great Housing Depression upon us will see insanely leveraged margin accounts go bad (today called "no-down home mortgages"), and boy, will there be consequences.

Someone made those loans. Someone holds those loans - and not just in the US, but around the world. Someone believes the collateral (the house) against the loan will protect them.

Well, when the loans go bad (payments stop) and the asset value plummets (house price declines), we got ourselves a heap of trouble.

Because of the lack of oversight on these loans (hello Fannie and Freddie), we basically have a system of unregulated, unwatched margin accounts being distributed to the masses, not even the educated speculator as in the 20's.

And the bagholders are going to get killed. And I don't think our highly leveraged, debt-addicted government can bail them out.

Panic in the 20's resulted in a run on the banks. Panic in the 2000's will see people trying to dump their houses at any price. Then as banks start to fail, a run on the banks themselves and use of FDIC's $100,000 insurance.

You'll see a slippery slope, you'll see momentum take over, and you'll see a Great Unwinding.

56 comments:

Los Angeles Friends In Deed said...

Aren't most of these loans on homes packages and sold to investors, in the form of shares?

Some "banks" or "financial institutions", such as ING makes home loans. However, I think in there case they are much more picky about who they loan to, the collatral, and down payments are more the standard 10-20%. I also understand that they tend to hold on to their home loans as opposed to reselling them to consolitators or other investors.

Anyone know if this info is accurate?

Wouldn't that provide some protection to a downturn, to a failure of thier bank?

Anonymous said...

Keith,
The problem extends beyond housing. Over extended credit is seen everywhere in our culture now. Detroit is finished. The "we will put you in a Jag no matter what your credit is" sales push is seen throughout our auto industry. And America is [was] all about building cars. The credit bubble has been keeping our this industry on life support and that will come to a sudden end here soon. A hard rain is about to fall...

Laura said...

Last week in the SF paper I saw a large ad put out by Countrywide advertising their interest rates for savings and CD's- I can't really remember exactly, but think it was about 5%. Anyone see this ad?

I was shocked - the only advertising I have seen by them lately has been for suicide home loan products.

In an article I read, this bank was rated one of the highest in the country for being highly leveraged in RE loans.

Could it be that now, this bank and other banks with high leverage will quickly instead turn to offering high interest rates on saving products to try to counter act heavy RE loans, since this market is all but dead?

If that is indeed the case, maybe these banks will come out of this downturn not that bad off after all.

It will be very interesting to see how high they are willing to go to interest rates to get some business.

If I am not mistaken, this is what happened in the late 1970's - when banks were offering 17% interest on their accounts.

Any opinions on this?

Laura said...

LAFID said:"Some "banks" or "financial institutions", such as ING makes home loans. However, I think in there case they are much more picky about who they loan to, the collatral, and down payments are more the standard 10-20%. I also understand that they tend to hold on to their home loans as opposed to reselling them to consolitators or other investors.

Anyone know if this info is accurate?

Wouldn't that provide some protection to a downturn, to a failure of thier bank?"

I was really suprised they did home loans, and found out after I opened a high yield on-line account.

It does worry me about bank leverage- only the strong ones will survive this downturn. I do know they are FDIC insured at least. Dont know if holding their loans is better- I would think the oposite, but who knows?

ING's interest rate has gone from 3.21 last september to 4.25 to date.

Natural Eyebrows said...

Don't sell Home Depot short yet. They'll sell lots of lumber as raw material for wooden nickels.

http://tinyurl.com/f25de

Metroplexual said...

And for boarding up windows on foreclosed houses.

Anonymous said...

Wild inflation is the only cure.

Anonymous said...

I take issue with saying the mass of speculators in the 1920's stocks were educated.

The bubble burst when the "man on the street" and shoeshine boys entered, and they are no different than today's real estate flippers.

Hey, the "experts" today are usually some newly minuted real estate agent who "owns" 4-5 properties herself for flipping...

Also most of the loans are syndicated, and the pain will be felt by all throughout the system. I am not sure of a collapse, but some painful losses. (Does not mean certain funds will not collapse though)

Anonymous said...

From a friend who is a senior level manager at Long Beach Mortgage …

Long Beach Mortgage, a subsidiary of Washington Mutual, is starting to see a dramatic increase in defaults.

The majority of their customers come from the Latino communities of OC, LA, IE, and SD. In the past, these sub-prime customers have been very good about staying current or at least refi-ing before they fall behind.

Long Beach Mortgage resells their mortgages with the agreement that they will buyback underperforming loans. In the past, this had been a non-issue for them since rapidly rising property values allowed the sub-prime bower to simply refi to get more money and continue to stay current. But over the past 60 days they have seen a DRAMATIC increase in the number of underperforming customers that can not refinance.

Ultimately Washington Mutual will be stuck with the properties. A ton of $800K mortgages on 2BR shacks in Santa Ana that are really worth half or less.

The point here is that Washington Mutual is highly leveraged to the performance of its sub-prime customers even though it has sold these loans off in the secondary markets.

“THE MOLE”

Jasunnyoutlook said...

Do you guys know the saga of Leo Wanta. Well i sugguest you read up on him. This might be the reason why markets have been looking so illiquid lateld. Leo wanta his money and he wanta It now. I/m not spoiling the plot for all who don't know, but it is intersting timing. Imagine what would happen if banks around the world had to recall 70 trillion dillars in loans and debt instruments.

Anonymous said...

Here is the link to Leo Wanta's story http://www.rense.com/general70/leo.htm

Anonymous said...

The world is ending and Jesus will return in a couple of weeks.

You must sell your belongings and send a big check to Pat Robertson or the 700 club by this weekend if you'd like to be on the list.

Jesus will be taking 700 club members first, then Americans, then the British, and the French last of course.

I'm personaly going to Paris for the party because I heard Heaven was overated and Jesus has smelly feet.

ker said...

Laura-

I have been mulling the same scenario in my head: banks need cash so raising rates on CD's helps them get it.

I'd lve to get an opinion from someone who actually knows something about the way banks "think"!

Budvarr said...

"I'm personaly going to Paris for the party because I heard Heaven was overated and Jesus has smelly feet."

Er...No, that would be Paris and the French you're thinking of, but could easily enough be Paris Hilton (just to get back on topic about the property market)!!

Fannie looking bleak said...

I read that FMN has $700B in loans it holds and has sold off $1B in loans that - IT GUARENTEES - there is trouble brewing. the market cap is only $44B, so how can they guarentee $1T in loans? If these numbers are wrong please correct me. I found them on the YHOO message board for FNM.

I believe that the collapse of FNM will be a huge history maker and a real drag on the US economy and the US dollar. I am still buying gold coins and trying to figure out where to put cash. T bills look OK for the very short term but long term I dunno.

PT had them pegged said...

The TV infomercials about buying RE for no money down, even if you have no money and/or bad credit still flood the TV. Put in a call with your ccard and for $9.95 they will send out the package to review for 30 days. they never say how much will be charged for the package. They are still seeking the greater fools.

Thanks Carlton. You da man!

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