Negative Equity In The USA?

The Mogambo Guru - Tue 17 Jul, 2007

In Barron's this week we learn that Macro Mavens estimates that "based on the share of ARMs in some state of negative equity at the end of last year and the decline in home prices so far in 2007, a stunning $693 billion in mortgage loans are already in the red." Wow! And even worse, "Assuming lenders are able to recover 70% of those assets - which seems optimistic given the massive amount of housing inventory yet to be unwound - that means mortgage lenders are already grappling with $210 billion in outright losses." And worse - much, much worse - is that based on the insanely risky degree of leverage that is so pandemic these days, "the total financial exposure to these claims is many multiples of that."

"$5 Trillion in Housing Wealth gone: The Impact of the
Housing Bubble Bursting" by a guy named Dr. Housing
Bubble, which is such a weird name that one can only
shake one's head in wonder at what in the hell his
parents were thinking when they named him!

But unusual moniker aside, he figures that the Fed and
the banks providing unlimited amounts of money to create
the real estate bubble (which I sarcastically note was
created by the Fed and Congress to bail out the busted
stock market bubble in 2000, which the Fed also provided
the financing for) has created $5 trillion in
"bubble wealth."

The significance of this is that "$5 trillion in bubble
wealth has created an extra $250 billion in consumption
that would not be present if it were not for the housing
bubble. This works out to be 2 percent of our GDP; in
other words, without that wealth we would already be in a
recession."

And now it's gone. You do the math.

And speaking of houses, in Barron's this week we learn
that Macro Mavens estimates that "based on the share of
ARMs in some state of negative equity at the end of last
year and the decline in home prices so far in 2007, a
stunning $693 billion in mortgage loans are already in
the red." Wow!

And even worse, "Assuming lenders are able to recover 70%
of those assets - which seems optimistic given the
massive amount of housing inventory yet to be unwound -
that means mortgage lenders are already grappling with
$210 billion in outright losses."

And worse - much, much worse - is that based on the
insanely risky degree of leverage that is so pandemic
these days, "the total financial exposure to these claims
is many multiples of that."

Mike Larson at Money and Markets hears me absently
babbling incoherently at this shocking revelation, and
adds to my misery by saying, "The Mortgage Bankers
Association says 0.58% of ALL mortgages entered
foreclosure in the first three months of this year.
That's the highest level in U.S. history!"

Grabbing a calculator instead of an Uzi (as is my usual
response to stark terror), I find that this means that
about 1-in-200 homes in America are in foreclosure!
Yikes!

But Mr. Larson is not impressed with my impressive math
skills, and ignoring me completely goes on to say, "A
whopping 14.51% of a specific group of subprime mortgages
made in the second half of 2006 are already either being
paid late, in foreclosure, or in a position where the
underlying property has been seized. That's simply
amazing considering these loans are less than a
year old!"

And it gets worse when he reports that loans made in the
first half of 2006 are performing even worse, and "Almost
18% of them are failing."

I was going to ask, "What about the ones made in 2005?",
but I sensed that I would discover that I would rather
not know, so I kept my mouth shut for once in my life.

And the news that "foreclosed properties are popping up
all over the place" is made worse because, "They
typically aren't as well-maintained as inhabited homes or
even 'regular' homes for sale. Some have even been
stripped of all their fixtures, wiring, and piping."

So how does a gutted, derelict eyesore affect surrounding
property prices? Ask my neighbours and find out! They
never seem to tire of telling me how my ratty little
house has ruined the values of the whole neighbourhood
and how gun barrels sticking out of the windows aren't
helping, either, and all this aside from the fact that I
am hateful and dangerous and blah blah blah.

So, attempting to be a good neighbour, I helpfully and
politely try to convince them to just pack their crap,
move out and go someplace else, which I do by
thoughtfully throwing my garbage on their lawns all the
time. But then - get this! - they get all bent out of
shape about that, too! I mean, I'm damned if I do, and
damned if I don't! You can't please those jerks!

But this is not about how my neighbours are all a bunch
of whiners who can't mind their own business, but about
money and mortgages, and if people don't have the money
to pay their mortgages, then that may explain why
consumer credit rose at an annual rate of 6.4% in May.

The stunning statistic was that the majority of the
additional borrowing was by people using their credit
cards, and their "total debt and death by plastic"
increased at an annual rate of 9.8%! Yikes!

And what were they buying? Well, I hear that an estimated
700,000 of Apple's new iPhones were sold on the first day
they were put on sale. And most iPhone buyers opted for
the more expensive eight-gigabyte model, too, which
retailed for $599!

Until next week,

The Mogambo Guru
for The Daily Reckoning 

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