Dear Editor:
The subprime/ adjustable/ HELOC/ ALT-A and other mortgage schemes have an estimate loss of 2.8 trillion dollars (see below). Today, only a few banks and mortgage companies have reported losses of some 20 billion dollars (see below). The vast majority of these crazy loans (that never should have been made) will not reset until 2008.
For comparison, the entire lose for S&L crisis was $150 Billion in 1988 dollars (see below). We are in the 1st inning of a massive write down of wealth that will affect nearly every aspect of financial life.
Consumer spending is 70% of our economy. For the last 5 years this has been greatly driven by these housing bubble and by people taking out Home Equity Loans on their ever increasing house equity to buy stuff. This has now come to a screeching halt.
The music has stopped. In fact - we are going in the exact opposite direction. I expect, on average, houses to lose 50% of their value from peak. Now imagine how that will affect the economy. Add in oil at near historical highs, the stock market at historic highs, gold at near historical highs, the dollar at historic lows and long term interest rates moving higher – something has got to give.
Regards,
2banana
http://www.truthout.org/docs_2006/091107R.shtml
Recession Time! The Housing Bubble Bursts the Economy
By Dean Baker
Subprime mortgages accounted for one-fourth of all mortgages issued in 2006. The equally troubled Alt-A mortgage category accounted for another 15 percent. With segments that account for 40 percent of the mortgage market going into convulsion, there was no way that the housing market as a whole would not be affected. Of course, record supplies of unsold new homes and vacant homes also ensured that there would be substantial downward pressure on house prices.
However, the direct impact on the housing sector is just the tip of the iceberg. The housing bubble created more than $7 trillion in housing wealth. Homeowners have used this bubble wealth to support a surge in consumption over the last five years, pushing the saving rate to near zero. They borrowed against their home equity to pay for vacations, new cars, or just to meet necessary expenses. As this bubble wealth disappears, consumption of all forms will be cut back, slowing growth and leading to more job losses.
40% x $7 trillion = minimum of $2.8 trillion in losses (yes - nearly all of these loans will go bad). This does not include $4-5 trillion in lost “wealth”; note that $6T has been extracted in MEWs in the last five years, so this is not at all unreasonable. This assumes a 30-50% decline in inflation-adjusted prices from ‘05 levels, which is already in process. We are at 30% here already.
Bank of America, JPMorgan face $3B hit - report
Combined loss would bring total writedowns from subprime-related securities to $20 billion, says the Financial Times.
October 8 2007: 6:55 PM EDT
http://money.cnn.com/2007/10/08/news/companies/banks/index.htm?source=yahoo_quote
NEW YORK (CNNMoney.com) — Bank of America and JPMorgan Chase are thought to be on the verge of announcing combined losses of $3 billion from mortgage-backed securities and leveraged loans when they report third-quarter earnings this month, according to a news report today.
The announcements would bring total losses at the world’s leading banks from subprime-related assets to $20 billion, said the Financial Times.
JPMorgan (Charts, Fortune 500) is expected to announce losses on leveraged loans of $1.4 billion, Sanford Bernstein analyst Howard Mason said in the report. He also anticipates it will suffer an additional $700 million in writedowns on mortgages and mortgage-backed securities, said FT.
Bank of America (Charts, Fortune 500) is expected to see around $700 million in leveraged loan losses and mortgage writedowns of $300 million.
JPMorgan and BoA do a lot of lending to private equity firms, so most of their writedowns will come from leveraged loan commitments they’d have to take a loss on if they sold now, the paper reported.
Merrill Lynch (Charts, Fortune 500) reported the largest credit-related losses at $5 billion. UBS (Charts) said it had $3.7 billion in writedowns, while Deutsche Bank (Charts) had $3.1 billion
and Citigroup (Charts, Fortune 500) reported $2.7 billion. Washington Mutual (Charts, Fortune 500) reported a hit of $410 million last week.
Smaller banks such as Wachovia (Charts, Fortune 500) are also expected to announce writedowns proportionate to their size.
http://en.wikipedia.org/wiki/Savings_and_Loan_crisis
The Savings and Loan crisis of the 1980s was a wave of savings and loan association failures in the United States in which over 1,000 savings and loan institutions failed in “the largest and costliest venture in public misfeasance, malfeasance and larceny of all time.”[1] The ultimate cost of the crisis is estimated to have totaled around USD$150 billion, about $125 billion of which was consequently and directly subsidized by the U.S. government, which contributed to the large budget deficits of the early 1990s. The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990-1991 economic recession.
That, my friend, is silly.
As I posted to you yesterday, gold is NOT at historic highs.
In many markets, house prices are down only slightly or not at all. Long before houses devalue by 50%, builders will stop building and owners of existing homes who are paying their mortgages (and that’s the vast majority of homeowners) will stay put.
I watched the show sell my house the other night and they had 3 homes for sale in 3 different parts of the country, Tenn, SC, Fl, they had been on the market for most of the year, 1 for 2 years. They did all kinds of crazy marking to get these things sold, 2 sold for almost less than their high and the one in Fl was rented out and just covered the mortgage.
BigMack