US mortgage crisis goes into meltdown

oilslick · Post by **oilslick** » 16 Jun 2007, 09:06

Looks like I broke the proper link so here it is working this time

We're currentlty at 6 so things are just getting going.

oilslick · Post by **oilslick** » 22 Jun 2007, 18:01

Not sure if anyone is following what is happening State-side but it appears that things may be about to turn very ugly. Without getting too technical, Bear Sturns have a couple of hedge funds that were heavily invested in subprime mortgages. The contents of these were about to auctioned on the open market which would have shown the world that all the derivitives that everyone is holding aren't worth anything like what has been paid. Cue finanicial meltdown as things like pension funds and the like HAVE to sell them.

Anyway, things have been delayed as a rescue package has been put together where Bear Sturns will foot the bill (probably through tax payers' money) to stop something which has the capability to bring the whole system down. The key point is that it's only delayed - this is all bubbling away until someone makes the first move.

This may explain it a bit better:

My understanding?.

The entire financial system is based on a CDO being worth what is owed to it. John Q Public deposits $250K with a hedge fund. Joe Schmoe borrowed $250K to buy a house, that loan was packaged into a CDO for $250K, then bought by the hedge fund with the investors money?.

Then, the $250K CDO is used as colatteral to borrow $2.5 million to buy more CDOs containing mortgages made to 10 more Joe Schmoes. This way, a 1% move in the market means the initial hedge fund investors make 10% on their money.

Repeat?. until there is over $1 trillion in CDOs used as colatteral for loans to buy the CDOs.

well, let?s say a few of the Schmoes start defaulting on their loans. No big deal. Foreclose and sell for $250K to cover the debt?. OOOPS!!!!! That $250K house that Schmoe bought, can?t be sold for $200K.

So, those CDOs start to drop in value just a touch. Suddenly, the 1% move = 10% ROI turns around. 1% drop = 10% loss. 10% drop =?

Well, when the hedge fund borrowed the money to buy the CDOs, there was an agreement to hold a certain value in assets. As the accets drop, margain calls means you have to sell the assets to repay your loans? it all unravels.

Well, if Merril sells the Bear Stearns CDOs for far less than ?book?, suddenly everyone has to revalue, and all have margin calls which means they have to repay their loans, which means more CDOs sell at lower price, meaning more revalues and more margin calls and more liquidations.

In short, the whole financial system based on leverage (using a small amount of money as collateral to borrow a lot) unwinds.

Think 1929.

http://thehousingbubbleblog.com/?p=2986#comments

Mean Mr Mustard · Post by **Mean Mr Mustard** » 23 Jun 2007, 21:06

Grandad, did you believe in Central Banks once?

http://www.bloomberg.com/apps/news?pid= ... dzlfjZPuxM

Post by **mikepepler** » 16 Nov 2007, 10:41

Deutsche Bank in ownership court row

An American judge has prevented Deutsche Bank from repossessing 14 homes because the bank could not prove it owned the defaulting mortgages involved. The ruling by Ohio district court judge Christopher Boyko could have serious repercussions for banks and mortgage lenders, for whom the pooling of mortgage securities is a $6,500bn (?3,200bn) industry.

Pooling involves taking hundreds if not thousands of mortgages, putting them in one unit, and then selling parts of that unit to others. As a result, it can often be unclear which bank actually owns the individual mortgages.
continued

Aurora · Post by **Aurora** » 16 Nov 2007, 10:43

mikepepler wrote:
Deutsche Bank in ownership court row

An American judge has prevented Deutsche Bank from repossessing 14 homes because the bank could not prove it owned the defaulting mortgages involved. The ruling by Ohio district court judge Christopher Boyko could have serious repercussions for banks and mortgage lenders, for whom the pooling of mortgage securities is a $6,500bn (?3,200bn) industry.

Pooling involves taking hundreds if not thousands of mortgages, putting them in one unit, and then selling parts of that unit to others. As a result, it can often be unclear which bank actually owns the individual mortgages.
continued

Unbelievable!

oilslick · Post by **oilslick** » 16 Nov 2007, 10:52

mikepepler wrote:
Deutsche Bank in ownership court row

An American judge has prevented Deutsche Bank from repossessing 14 homes because the bank could not prove it owned the defaulting mortgages involved. The ruling by Ohio district court judge Christopher Boyko could have serious repercussions for banks and mortgage lenders, for whom the pooling of mortgage securities is a $6,500bn (?3,200bn) industry.

Pooling involves taking hundreds if not thousands of mortgages, putting them in one unit, and then selling parts of that unit to others. As a result, it can often be unclear which bank actually owns the individual mortgages.
continued

Yikes...that is proper scary. That really would be anarchy time! Could be fun...I'm off to get a house I can't possibly afford. Think I'll ask NR for a mortgage

oilslick · Post by **oilslick** » 16 Nov 2007, 10:57

ianryder wrote:If anyone's interested a seriously good overview of what's going on this is worth a look:
http://www.bloomberg.com/avp/avp.asxx?c ... iIsfZM.asf

In case you'd forgotten how bad this is going to be, this is from way back from before the credit crunch kicked in. Scary stuff.

Post by **mikepepler** » 23 Nov 2007, 08:49

Not quite the right title for the thread any more, as the credit crunch is more than just US housing. For example:

Investors in Europe have suddenly become wary of Italian, Greek, Spanish, and Belgian sovereign bonds, driving spreads over German government bonds to the highest level in six years.

Yields on Italian 10-year bonds rocketed to 40 basis points over comparable German Bunds today as the flight to safety gathered pace. The spread had been stable at around the mid 20s for several years until this month.

The scramble to dump riskier bonds hit all the southern European countries, as well as Ireland and Slovenia.

While the markets have not begun to discount a possible break-up of the eurozone, they are clearly pricing in an ominous rift between the Latin and Germanic halves of the monetary system.
continued

Seems like the "riskier" countries governments are going ot be short of credit soon..

Totally_Baffled · Post by **Totally_Baffled** » 23 Nov 2007, 10:29

http://efinancedirectory.com/articles/M ... _U.S..html

Looks like the credit tightening has a way to go yet!!

Andy Hunt · Post by **Andy Hunt** » 23 Nov 2007, 10:35

Oh flippin' 'eck . . .

oilslick · Post by **oilslick** » 23 Nov 2007, 11:17

And guess what...the UK market has pretty much mirrored California for the last however long. So expect our graph to look a bit like that some time soon...suspect it's already showing similarities.

It says in the article about how all the bubble states are going north in a similar way. Scarily the whole UK is an even bigger bubble state than any of theirs.

PaulS · Post by **PaulS** » 23 Nov 2007, 11:49

Makes me wonder if I should not dive in and withdraw the remaining cash in my Barclays account. It is under the ?30K protected limit, but several UK banks start crashing the not even the BoE will have the necessary resources to repay everyone (unless they just print some more money!)

Totally_Baffled · Post by **Totally_Baffled** » 23 Nov 2007, 11:52

I like this graph.

Why analysts could not see this "bubble" is beyond me....

Like you say oil slick its similiar the UK's....

I guess the difference between the two markets is that in the US there is no shortage of land for building all the homes required.

In the UK we are looking at 150,000 homes being built per annum, with 250,000 - 300,000 households being formed per year.

Thats some gap in supply!?

It also looks like the BOE is going to choose the inflationary route (when faced with the choice) rather than recession (caused by deflationary higher rates which would include houseprices) it looks likes they will cut rates at LEAST twice next year.

It could be even more if the US cuts theirs by a whole 1% point! (as speculated on the BBC)

http://news.bbc.co.uk/1/hi/business/7108973.stm

The Fed then lowered its 2008 growth estimates for the world's largest economy, prompting many analysts to predict that it will need to cut rates by as much as 1 percentage point to stop the US from going into recession.

oilslick · Post by **oilslick** » 23 Nov 2007, 12:29

I don't buy the property shortage bit at all. Are you tripping over people who have nowhere to live? It's all propaganda - notice they always say 'shortage of affordable property'.

We're about to find out there really is no shortage as there are loads of empty properties out there. Sure, there's a shortage of lovely houses in the lovely village I rent in. But there was 15 years ago as well. That's why it will always be more expensive relative to somewhere less nice. It's also partly why it's nice as it's not overgrown with houses.

There's been a shortage of houses to buy because buy to regretters have been snapping up anything they can like lemmings. They're thinking twice now so suddenly nobody can sell any more - it's all over the press and is the first stage of the downslope. First time buyers buggered off ages ago so nobody else is there to step in unless Gordon comes up with another piece of magic.

Anyway, the reality is now that credit has gone from 'anyone can get it without a problem' to 'it's getting harder to find but still out there' and now entering 'will only lend if you have 30% deposit, 3 x salary and you're a GP or something that won't get laid off straight-away' mode.

I can honestly see credit drying up almost totally pretty soon. The downslope may actually just be a vertical line. Time to prepare the parachutes!

stumuz · Post by **stumuz** » 23 Nov 2007, 12:43

[quote="Totally_Baffled"]

Why analysts could not see this "bubble" is beyond me....

Yeh but, no but, yeh but, no?.

But this graph which shows the steep curve from 1890 does not take into consideration the same steep curve increase in population. If you extrapolate that so many more people are chasing the same amount resources, then this steep curve is hardly surprising?

After all, is this just what everyone on this forum is predicting? The price of oil is just going one way. If we eat oil in the food we consume and live in oil (construction energy intensive) in the houses we live in.
Then surely these commodities are only going one way as well?