Ya know, I'll admit on this one, it truly IS different this time. We've never been here before. These, HP'ers, are historic days. And we ain't seen nothin' yet...
Here's the great expose from BusinessWeek on the CLO bomb. I'll give this MSM read props, they're really on top of the housing implosion now (a bit too late):
Danger—Explosive Loans - Collateralized loan obligations offer loads of cheap money. But payback time may be coming
It might be pure accident that one of the most important financial innovations of the past 20 years carries the clunky name "collateralized loan obligation." Or it might be that the wizards behind the instrument could work their magic best behind a curtain of baffling adjectives and nouns. So far the instruments have escaped major scrutiny. But while market watchers have spent the past few years wringing their hands over hedge funds, CLOs have become an even more integral part of the financial system--and just as worrisome.
But while financial innovations fuel booms, they also tend to worsen busts. Wall Street's lack of willpower is legendary. The pattern goes like this: Come up with a brilliant idea, nurture it until it catches on, then flog it until it breaks.
But the money is getting too easy for everyone's good. Some credit market veterans are starting to kick around the old banking maxim that the worst loans are made in the best of times
Worrisome signs are mounting. The amount of leverage used in deals right now is greater than the previous record set in 1997, according to Standard & Poor's
The full consequences of the CLO boom won't be known until business slows and borrowers can't raise more money to keep going.
October 19, 2006
Will CLO's (explosive loans) crash the world financial system?
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CLOs are in the advanced class, whereas 99.9999999999% of the population is stuck in the 100 level coursework
You may be at risk and not know it. Some 401(k) funds (mostly GIC-type) own CLOs, CMOs, ABSs, etc. Make sure yours isn't one of them.
Veterans of banking say that the worst loans are made during the best times. So true. My uncle was a home builder in the 70's and he used to say " I hope I never see another boom again" Why? Because its during booms that guys get overextended and overpay for land and such. In bust phases people are conservative with costs and disciplined not to overdo it. He got rocked in the bust of '73 and nearly lost all he had after developing 20 houses which didn't sell as interest rates jumped in the arab oil embargo.
Here is a twist from MoneyNews.com
I guess interest rates will go down again Oct 24, to boot.
Mortgage Delinquencies Rise; Credit Standards Ease
Despite rising delinquencies on home loans, mortgage lenders continue to ease lending standards because of the cooling housing market, says The Wall Street Journal.
The abrupt loss of demand for mortgages has heightened competition among lenders, forcing them to loosen up on borrowing requirements. At the same time, borrowers are increasingly missing payments or defaulting on their home loans mostly due to the lax lending standards, resulting in a vicious cycle for banks.
Data from Equifax and Moody’s Economy.com shows the number of past-due mortgages rose 2.33 percent in the third quarter, the highest level since 2003. But unlike historical patterns, the defaults aren’t because of a weak economy or high job losses. Instead, the Journal says the data points to loose lending standards.
"We're seeing rises in delinquencies and loan losses that are unrelated to what's going on in the job market," Mark Zandi, chief economist of Moody's Economy.com, tells the Journal. "It's very unusual."
The comptroller of the currency, John C. Dugan, is warning banks to tighten up their standards or risk the consequences, reports the Journal. "We don’t want to see lending decisions bankers make today result in excessive foreclosures — and reduced affordable housing credit — tomorrow," says Dugan.
Dugan adds that bank regulators have noticed a "significant easing" in banks’ lending policies. A report by the Office of the Comptroller says 26 percent of lenders eased their lending standards on mortgages, usually by making more available nontraditional mortgage products such as interest-only loans and balloon payment loans.
More than one-third of lenders eased standards for home-equity loans in the 12 months that ended in March. Less than 5 percent tightened standards, says the report.
"We have reason to believe that the amount of easing we saw back in March is continuing," says Kathryn Dick, deputy comptroller for credit and market risk at the OCC, to the Journal.
Editor's Note:
In German, the "water closet" or "closet" (toilet) is nicknamed the "clo".
Despite rising delinquencies on home loans, mortgage lenders continue to ease lending standards because of the cooling housing market, says The Wall Street Journal.
++++++++++++
This is insane--a prescription for disaster....
It's all already been wrote about in the bible. Cashless society, I mean we have been set up by a power that knows when derivatives are trading by leverage at now more than a quad-drillion dollars a year, that there isn't even enough paper to print the money. If you want to see this world financial system as a whole picture then you must start thinking in terms of a one world program that will lead to ultimate power in the hands of those who will want us to buy and sell with a mark and that will that seal our fate. But, there is hope, read the book section of Romans in the bible, if you believe what it says then you can escape this mark. Time is of the essence.
Flyingmonkey -- you got it straight. I've heard the same thing from people working in mortgage finance. The Fed quietly told them to solve the option-ARM problems that are popping up, and they are doing that by refinancing people into longer-term fixed loans at no cost. My brother (works at Countrywide) tells me that about 1/4 are beyond hope and they are going to lose their ass. But the other 75% will get refi-ed and live to fight another day. They are even allowing the new mortgages to include car loans, credit card balances, and HELOCs.
Keith and his minions are ignoring this ongoing fix that will largely short-circuit the HP.
fixed rate HELOC?
that is a good one.
"fixed rate HELOC? that is a good one."
No dumbass, they will roll any existing consumer loans, including HELOCs, into the new mortgage balance. The new payment is higher than the old option-ARM payment, but usually a lot less than the combined payments before the refi and payoff of the other debts.
OH.Bye Bye HELOC ATM.
Got it...
I just found a great site for loans and financial info.
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