patrick.net

Wow, just poking around in the bible, I found several places which clearly foretell the housing bubble. For example:

Folly is set in great dignity, and the rich sit in a low place.

That obviously refers to fools who take out subprime loans while rich renters wait for them to be foreclosed on!

And this:

And the wild asses did stand in the high places, they snuffed up the wind like dragons; their eyes did fail, because there was no grass.

That must be about the asses in rich neighborhoods who are running out of money, or maybe running out of dope.

And finally:

But the saints of the Most High shall receive the kingdom, and possess the kingdom forever, even forever and ever.

So the saints of the most high (that must be renters in Palo Alto) will possess the kingdom forever!

Patrick

Why is deflation written about as if it were a bad thing? Personally, I love deflation because it means lower prices for pretty much everything.

OK, I can see that people will hold cash instead of investing it, because the cash is increasing in value. But that will end eventually as people spend the cash (unless the Fed just prints forever).

And I can see that it’s hard to start up a business knowing that profits will probably decrease in nominal terms, but that can be managed, because costs will decrease as well. And if the business generates cash, that cash is more worth getting in a deflationary environment.

Maybe deflation is exactly what we need for a while, to wipe out foolish debtors and get the economy back into a sustainable state.

Patrick

A friend of mine who just refinanced in SF Bay Area tells me that the single-family conforming limit (the maximum size mortgage that can be sold to Fannie or Freddie) was not actually raised to $800,000 or whatever they were threatening to do. The conforming loan limit for the SF Bay Area is still $417,000.

What’s going on? I’m grateful that there is a limit to the insanity, but I somehow I missed hearing about this in the news.

I thought we were all even more screwed by Congress’ agreeing to put taxpayers on the hook for really huge mortgages. Why didn’t they do it? It’s so unlike them!

Patrick

To buy anything with debt is to double its cost.

What if we all just rented until we could pay cash?

What if we saved until we could pay cash for a car?

What if the government paid expenses only from the current year’s tax revenue?

What if we did not use credit at all?

I think the world would be a much better place.

Patrick

With CD’s paying 4%, and Wells Fargo charging 8.8% for a jumbo 30-year fixed, maybe I should finance someone’s jumbo mortgage — but only for a house that I’d actually want to live in. Either I get direct interest payments up around 8%, or, if the user defaults, I get the house. The trick would be to lend only the amount that I’d be willing to pay for the house in the first place.

Is it evil? Is it risky?

Perhaps the entire credit crunch could be fixed with very high interest rates. Currently, banks and other institutions have to compete with the suicidally low interest rates of the Fed and the Treasury bailout programs.

Say you’re a bank and you know that a new mortgage loan has a 10% risk of default. Then you have to charge at least 10% to compensate for this risk before you can even begin to make a profit. But you can’t charge 10%, because you’re competing with the Fed’s 2% rates, and the Fed is lending without regard to default risk. So you would be committing bank suicide to make loans in a market poisoned by the Fed’s rates, knowing such loans will generate a large loss on average.

OK, the bank can get something from the defaulted loans by foreclosing and selling off the houses, but still, the point holds: the Fed is ruining the market for credit. It’s kind of like American manufacturers being ruined by cheap Chinese imports, only it’s American banks and savers being ruined from within our own country, by the Fed.

The directors of the Bank of England once bragged that a 10% interest rate could “draw gold from the moon”. If it’s credit we lack, let rates rise, and watch credit problems disappear.

Patrick

Aloha Patrick,
I am intrigued by Countrywide’s offer to lend $824,000 to John in your news links and have wondered… is all this hype about credit somewhat mythical? It would be interesting to find out what people can still borrow and what they can’t. I just qualified for a Home Depot credit card in 3 minutes over the phone for $7000. My score is in the high 600’s to low 700’s.

So my question is this: when they talk about the credit crisis what are they refering too? People with low scores and incomes that creditors can’t prey on anymore, banks that have reserves but are unwilling to lend, or businesses which are going under but somehow managed to get credit even when filing bankruptcy, like Circut City? Or my favorite: the contractor who bought his debt back, featured recently in your blog? By the way how did Houdini do it? Inquiring minds want to know. Are there any more articles on this guy? What’s really going on here? Someone’s not playing fair in the gov’t, Wall St powers that be, or…? Somebody’s making the rules up as they go cause I smell a rat…

Kim

Patrick

Saw this on my rss feed from Yahoo/Reuters just now:
Glimpse into a new financial system

LONDON (Reuters) – Investors get a first glimpse of the likely shape of the new global financial system this week as finance chiefs prepare for a summit of world leaders fighting the worst world financial crisis in 80 years.

The rest of the article does not actually say what this “new financial system” is - just a vague statement about fiscal stimulus from the G20. Does not quite match the more ambitious tone of the title. Is this a case where the original article was whitewashed to remove the details, but they forgot to change the title?

In any case, what will the new financial system look like? I have heard all the rumors, and have no idea what to expect when the crooks get together behind closed doors.

SP

Hello,

I just read an article in the NYTimes that was disconcerting and even frightening.

http://www.nytimes.com/2008/11/02/business/02global.html

According to the article, school districts, municipalities, and just about every governmental entity that either has money to invest or borrows money could potentially end up getting sucked into the credit crisis. That means that there could be countless ticking time bombs across the United States in the form of pending financial shortfalls and bankruptcies that will further depress home values in towns and cities across the country.

Imagine buying a home at what seems like a bargain price, only to find that the local school district or government is on the hook for a couple hundred million dollars in losses because a few unsophisticated board members fell for what’s turned out to be a global investment scam. Once the word gets out, the town’s home values will nose dive. After all, it’s the local tax payers who will eventually have to pay the pipers.

The Wisconsin school board in the article might not only lose the $35 million dollars earmarked for teachers’ pensions, they’re liable for an additional $165 million that the board borrowed on their behalf. Where does a town that can’t afford to lose $35 million in the first place come up with another $165 million? What happens to the teachers who lose their pensions? Who wants to buy a home in an area where the schools are forced to lay off teachers, cut programs, and cant afford to purchase books or supplies?

Is there any way to find out what municipalities and school boards are in potential trouble? Can a potential home buyer request relevant information from a town or city? Is there a website that contains this type of information?

As a prospective home buyer I’d have to say that this concern belongs at the top of the list of reasons to postpone buying a home in this market.

Charles

How much control does the Fed really have over mortgage rates and CD rates anyway?

I know the Fed controls interbank lending rates, and can influence US Treasury rates for existing bonds through purchases and sales, but I was never clear on how all of that filters through to mortgages and CDs.

Who loses when the Fed lowers rates? Savers clearly lose, because CD rates seem to follow Fed rates for those unclear reasons, but probably others lose as well.

Patrick