Operation Destroy the Dollar: H.R. 1852 Objective Number One – Bailout the Lenders.

You can tell it is an election year when political operatives try to pander to every single group with no long-term thought process of the implications of instant gratification. Maybe that is why the United States on a personal level, has a negative savings rate. How can the government encourage people to save and be prudent when they do the complete opposite? Let us take a look at the winners with this newfound ease in lending:

Home Loans: Winner because they become cheaper

Auto Loans: Winner because payments will be lower

Credit Cards: Winner since your APR just dropped from 18 percent to 16 percent
Lenders: Winner since they are given a lifeline to do more loans

Savings Account: Losers since your interest rate is lower than inflation

Dollar: Loser as you can clearly see by the drop below the 80 support level

Pretty basic right? But if you think about the deeper ramifications of the decision it shines the light on an eerie part of our economy. The only way we can keep this game going is by making savings unattractive to the masses and encourage spending at all cost. Many investors realize the game is up and are diversifying out into foreign currencies, stock, and everything else that will benefit from a falling dollar. Many are doing short-term call options and figure they can make a profit on these pseudo bull runs. This does not help the massive majority of Americans. How is this good for our country in the long run? Today we will take a look at an absurd piece of legislation that passed the house, H.R. 1852. I will translate the key points for you into blunt language and what it means to you and our country. Take a look at this press release issued a few days ago from the House Committee on Financial Services:

· Lower Down Payments. Authorizes zero and lower down payment loans for borrowers that can afford mortgage payments, but lack the cash for a required down payment.

Translation? We are going to institutionalize subprime lending! Forget about the tried and tested 10 and 20 percent down payments of yesteryear. We are overhauling the system to remove down payments. After all, we have a hard enough time saving anything month-over-month so how can we expect people to save a few thousand dollars? So instead of requiring this archaic “saving” that is so passé, we are going to allow people, assuming they can make the monthly payment, to purchase homes even if the prices go beyond financially prudent ratios. Down payments exist for a reason. They show that a prospective buyer has the ability to tighten their belt and manage their finances for a few years to purchase a home; normally this is achieved by foregoing spending on other discretionary items. But you can have your cake and eat it too in the mortgage world! Debt is saving in this apparently brave new world.

· Housing Counseling. Authorizes more than double the current funding level for housing counseling, to help subprime homebuyers and borrowers late on mortgage loan payments.

Do we really need housing counseling? I can imagine one of these sessions:

Counselor: “Can you tell me about your current situation?”
Supbrime Borrower: “Ok. Someone from one of those now bankrupt lenders gave me this great 1.25% teaser loan and told me it wouldn’t reset for a long time. I didn’t read the note because hey, I trusted him since he was in a nicely ironed suit. When he said long time I thought he meant 10 years, not 2 years. Now my payment went from $1,250 a month to $2,200. What can I do? I barely was able to afford it even with the crazy teaser rate?”

Counselor: “Damn. Looks like you need to increase your income by adding an all America 2^nd or 3^rd job. Another option is to go into foreclosure since the market price on your home is now less then the mortgage balance. Oh hold on a second…I’m getting a fax from our blessed government. [pause to get fax] Hey! Good news. We can refinance you into another loan with another teaser rate since the government is now subsidizing these loans.”

Subprime: “Great! Because I was looking at this other home that I would like to flip…”

The folks that need “counseling” are the lenders and the policy makers for thinking this is a good long-term strategy.

· Subprime borrowers. Directs FHA to provide mortgage loans to higher risk (but qualified) borrowers, without authorizing unnecessary fee hikes on such borrowers.
Reverse Mortgages. Enhances the FHA reverse mortgage loan program to help seniors pay for health and other expenses, by removing the loan cap to avoid program shutdowns, raising loan limits, and by reducing the maximum fee lenders can charge for these loans.

Higher risk but qualified borrowers? Bwahaha! You couldn’t write more Orwellian language. Could it be that they are high risk because maybe they can’t afford the home? This is like saying that a person is perfectly suitable for working at the drug enforcement agency so long as his cocaine and heroine addiction doesn’t rear its ugly head while raiding a drug house. As we are seeing, it is unethical to give someone that doesn’t have their financial house in a row $100s of thousands of dollars in the form of a mortgage only to have them lose their house later on. That is why we have [had] lending standards. When lenders had to hold the notes they actually vetted the loans with higher scrutiny because a foreclosure would hurt their books. Now we have this moral hazard where we are encouraging irresponsible lending. This doesn’t help the homeowner. This is horrible classical conditioning on a mass scale. What we are telling people is credit doesn’t matter, saving is irrelevant, and bad financial moves will have a bailout from the government. Does this make sense?

Then the reverse mortgage portion is just classic. You can see the light bulb over these congressmen go off. “Next year is so important. Older voters are an important constituency group.” Since Social Security is peanuts and the cost of living adjustments are based on ministry of truth data, they only see marginal increases. The majority don’t have adequate savings but what do they have? Over inflated home equity! How about we slap on another virtual ATM and drain all their savings so instead of the equity going on to their children or grandchildren, it will go to the good old government. Amazing planning here. Let us keep reading.

· Multifamily Loans. Raises FHA multifamily loan limits, so these loans can fully fund construction costs in high cost areas, and enhances sale of foreclosed FHA rental housing loans to localities, so that affordable housing can be maintained in local communities.

You really need to put on your doublespeak reading glasses for this one. So they want to raise FHA multifamily loan limits to encourage affordable housing? They are basically forcing prices to go up. If the market played itself out, construction companies that are able to acquire cheaper resources and labor would be forced to pass on the savings to consumers via more affordable housing. But this legislation assumes that current housing bubble prices are justified and are trying to institutionalize them under the guise of good public policy. What we need is less legislation and more open market competition. Think about it. If you have two companies and materials are being driven down because of competition and efficiencies, then the company that can provide lower priced goods to the market will win. That means lower priced homes and more sales. Did you notice how Hovnanian had no problem attracting buyers when it slashed prices by $100,000? But here, we have this big government mentality and you’ve seen the ridiculous budgets where toilets cost $2,000 and pens go for $30 each. Do you really think these companies compete when they know they have a locked in price? Why do you think communism failed so miserably? And the language is scary. What do they mean “fully fund construction costs” in bubble areas? They call them more expensive areas instead of overpriced bubble metro areas fueled by rancid loans but I think the PR folks removed that language. This is a blank check. Make sure you contact your representatives in both houses and contact the White House to veto this. Maybe Bush will dust off the pen and use it for once.

· Affordable Housing Fund. Authorizes up to $300 million a year from the bill’s excess profits for affordable housing, instead of returning such funds to the General Treasury.

You don’t need the affordable housing fund if you relax zoning rules, stop bailing out lenders, and make these folks accountable for their actions. They are trying to seal high prices into the system as a paradigm shift. These folks want you to believe that higher prices are just a thing of the modern day as opposed to being fueled by exotic funky lending and mass greed.

· Higher Loan Limits. Adopts the Frank/Miller/Cardoza amendment that would raise FHA single family loan limits, which now bar loans above 95% of the median home price in each local area and shut FHA out of higher cost home markets. The amendment raises the FHA loan limit in each area to the lower of (a) 125% of the local area median home price or (b) 175% of the national GSE conforming loan limit. The amendment also also retains the bill’s provision for a nationwide FHA loan floor of 65% of the GSE conforming loan limit, and gives HUD authority to raise these loan limit amounts by up to $100,000 “if market conditions warrant.”retains the bill’s provision for a nationwide FHA loan floor of 65% of the GSE conforming loan limit, and gives HUD authority to raise these loan limit amounts by up to $100,000 “if market conditions warrant.”

This is the one that is getting everyone worked up. How is raising loan caps going to help the family on main street USA by pushing limits over $500,000? I thought the median price was somewhere around $225,000 for most Americans? Oh! I forgot. Lenders make their most profits from overpriced bubble metro areas therefore we should ask our brothers and sisters in Wyoming, Montana, Arkansas, and every other non-bubble state to contribute to their mass greed. Make no mistake. This bill is 95 percent for the housing industry. It will not help you or your family if you are facing foreclosure. They will use the 1 or 2 examples to get media heart bleeding and lenders going into crying moments (did you see that Youtube video of the guy pleading for Brittany?); it’ll be something to that effect but everything is garbled up in this translation. Pandering at its finest. How is someone in a high priced area with a $400,000 or $500,000 mortgage with a family income of $50,000 going to get help if the main problem is a pricing and income issues? Unless they want to give everyone a 50 percent mandatory raise, I’m not sure how this helps anyone except lenders on the large part by washing their hands clean ala Pontius Pilate of unethical and corrupt mortgage products?

Doublespeak: Helping Minorities Pad our Bottom-line

Someone once told me that getting married is easy, staying married is the hard part. During a presentation, one of the nation’s mortgage lending leader reiterated their goal of helping minorities to own homes. The government always throws this PC statement out. The last few years these lenders have done the most damage to minorities. Guess who are the folks who are losing their homes because of subprime lending in the largest numbers? These greedy lenders didn’t care about folks’ long-term well being, they only cared about putting people into homes and getting their nice commission cuts. So what if 1, 2, or 3 years down the road the family drowns in their own debt service? Setting people up for failure is not the American way.

The fact that many are subprime meant they couldn’t afford homes to begin with. Simple way to avoid this mess from the start. If people want to buy homes why is it so bad to ask that they save a minimal down payment? You know why? Because this slows the real estate complex down. During this time people aren’t buying, selling, refinancing, busting out home equity lines of credit and all things where the housing Ponzi Scheme gets their money from. To use this “we are helping minorities” line is arrogant and absurd. Why don’t they address the real reason that of massive inequities in pay for minority groups? Oh! We can’t talk about income because that is taboo. Yet they are okay with putting people into ticking time bombs. A good senator and representative, for example, in voting for a war should always ask themselves if they would send their own child to a conflict. In the case of lending, a good lender should be required to ask, “would I loan this person money if it came out of my own bank account?” Guess what your answer would be?

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Lessons From the Great Depression: A Letter from a former Banking President Discussing the Bubble.

As we hit record lows with the markets, it is clear that we are entering a correction phase. With the incredible response we had to a personal letter from a lawyer discussing in great deal, the failures of the previous Great Depression bubble we can see many parallels emerge to our current potential future. For one, the wanton greed and disregard of financial prudence. The inability to see beyond the current market and realize that history has a mischievous way of sneaking up on those who forget her. There is no longer a debate regarding the once fabled housing bubble. We can all take off our tinfoil hats off and begin to construct a vision of the future in the midst of a collapsing housing market. Today I’ll be posting an article that came out in the Saturday Evening Post in November of 1932 from a former bank president in New York, three years after the crash, highlighting the economic situation of a post bubble world. This is an old article so I retyped the important paragraphs:

“If I draw illustrations from the banking field to indicate the limits to which the depression reached, it is only because I am writing about banks and not because the banks are the one glaring example marking the extent of the financial cataclysm. The railroads, the insurance companies, the building-and-loan societies and mortgage companies would quite as well depict the situation.”

The collective memories of many Americans believe and associate the Great Depression igniting from the heart of Wall Street. However, it is clear that many industries built around financial imprudence also failed during the Great Depression. Think of the many industries currently facing hard times with the housing decline: insurance companies, mortgage lenders, hedge funds, the auto industry, home remodeling centers, and many other housing associated industries. Can it be that for the past decade, we have been using the home as a center of economic prosperity? Clearly it has helped to a certain extent with unparalleled amounts of mortgage equity withdrawals. There are estimates from the FDIC that $5 trillion in wealth has been directly linked to this housing boom. How much was really lost during the three years following the Crash?:

“The decline in the price of bank stocks was only a minor phase of our debacle. The quoted value of all stocks listed on the New York Stock Exchange was, on September 1, 1929, $89,668,276,854. By July 1, 1932, the quoted value of all stocks had fallen to $15,633,479,577.”

“Stockholders had lost $74,000,000,000. This figure is so large that not many minds can grasp it. It is $616 for every one of us in America. It is, roughly, three times what we spent in fighting the World War. The bursting of the South Sea Bubble concerned a single company. In the bursting of the New York Stock Exchange bubble, the value of all stocks fell to 17 per cent of their September 1, 1929, price – almost as great a drop as the South Sea Company stock, with its fall to 13 per cent of its top price. Remember that this calculation is not a selected example. It is made from the average of all stocks listed on the Exchange.”

So $74 billion was lost. A massive amount. What would happen if say the $5 trillion in housing wealth would suddenly disappear? Instead of bank failures we are now facing hedge fund debacles and everyday it appears that another mortgage outfit is closing shop. Mortgage resets are hitting the market to the tune of $30 billion a month with our peak month hitting in October with $50 billion resetting. We will not fall below the $30 billion monthly mark until September of 2008. Most experts are now predicting a declining market until 2009 and these are optimistic projections.

“The South Sea Bubble wasn’t so much! We have done pretty well in the way of bubbles in our own time. All financial history shows no parallel to what we have been going through. Never before, in this country or anywhere else, has there been such a general loss in “security” values.”

Bubbles will always occur in profit driven systems because of human nature and bubbles will bust when they reach a Minsky Moment. In addition, the psychology at a certain point tips and the market no longer follows previous rules. The system was built on consistently appreciating real estate and when this ended, it turns out that millions of people were swimming naked. The only question now is how long will the market retrench. Unbelievably, those that pumped up the bubble are crying for compassion for the desolate homeowner now losing his home even though he is laughing all the way to the bank. Since he is partly responsible for the massive speculation, why doesn't he cut a check from his decade long bubble profits if he feels so bad? Instead, they want the entire nation to carry the burden of this massive credit orgy. If they truly believe in free market capitalism, then what is currently happening is the end result; the market is washing out all the excess from the system. Yet the Fed injecting liquidity amounts to corporate welfare and is only prolonging the inevitable decline.

“The decline in the quoted value of New York listed stocks is only part of the story. The total of real-estate mortgages in default, particularly mortgages on city property, is unexampled. The value of real estate can no longer be accurately appraised, because the market for real estate has been practically paralyzed.”

We are already seeing this. Many REO properties are simply sitting on the market and stubborn lenders and sellers are refusing to lower prices. Buyers are refusing to buy or are unable to get loans. It is a Catch-22 that is accelerating the market on a downward spiral. People realize that housing is going down and are suddenly reluctant to buy. The MBS market now seeing the intestines of their portfolios is realizing that some overpricing may have occurred. I’m not sure if any of you have seen the new housing syndicate marketing angle (I caught a glimpse of this on late night infomercial happy television). They are now pushing, get this, FHA loans! Suddenly, the industry that pumped interest only, hybrid, reverse mortgage, 2/28 loans, stated income, and every other weird concoction of loans is coming home to the safest of the safe. But the scary implication here is they are touting, “no need to worry here, these are government insured.” Guess that means the American tax payer is going to bail out the housing industry. At least this is what the housing industry expects.

“The loss of $74,000,000,000 in the value of New York listed stocks is something more than a mere item of financial data. Implicated in it are ten million cruel heartaches. I am using “million” as an adjective, and making an understatement. The laborious savings of an uncounted number of lifetimes have been swept away. Prudent provisions for the future has been made to contrast unfavorably with the pleasures of spendthrift waste…”

The real pain is in what happens on a micro level. Like the couple earning $130,000 a year that lost their home to foreclosure and is now facing hard times; these are the real stories behind the bursting bubble. What is the psychological and financial impact of those put into 2/28 homes and are now facing foreclosure? There is no financial benefit to the buyer for jumping into a 2/28 loan aside from squeezing into a home they cannot afford over the long run. The only one benefiting from this is the mortgage broker who gets a stronger kick back for putting you into a risky loan and the agent from getting a commission check after escrow closes. What do they care? The loan is getting an extreme makeover on Wall Street and they'll never see it again. The transparency legislation now being pushed is 7 years too late. Wall Street has turned off the spigots earlier in the year. Don’t worry about the large mortgage outfits, many top CEOs and executives actually sold out [are in the process of selling out] near the peak.

“Not only did our investments shrivel in the last three years but we even frequently lost our pocketbooks. Cash in hand, left for safekeeping in a bank, often went the way of our investments, and worse. Almost $3,000,000,000 of our daily-used cash funds were sequestered in the doubtful assets of the 4835 insolvent banks. Widespread communities were left with only the mattress as a safe depository, and with little to put into it. People became so frightened in regard to the safety of the banks that they locked up in safe-deposit vaults, or selected elsewhere, more than $1,500,000,000.”

We don't have to worry much about losing savings accounts considering Americans now have a negative savings rate. Try imagining you are now in 2009. What do you think the sentiment of the American public will be when trials are going on regarding shady lending practices? Many defunct companies are now getting their legal houses in order preparing for this. Even with the previous scandals such as Enron, many folks saw this as something far and away since few even understood what Enron did or what laws they broke. But everyone will understand the debacle of the housing industry because it hits every American. It is a simple story of greed and financial negligence. And one thing is certain, Americans do not like gambling with their homes unless they are winning. Now that many are losing, they’ll be out for blood. The Democrats are already taking aim and claiming it is the mortgage brokers fault for putting us in this mess. Of course there are other major players including the Fed, hedge funds, buyers/sellers, agents, appraisers, and flat out greed.

“This is a shameful and humiliating exhibition. It is uniquely bad. Across the border in Canada, there was not a single bank failure during our period of depression, and one must go back to 1923 to find even a small one. Nowhere else in the world at any time, were it a time of war, or of famine, or of disaster, has any other people recorded so many bank failures in a similar period as did we. We were not experiencing a war, a famine or any other natural disaster. All the economic tribulations we have undergone in the past three years have been man-made troubles, and Nature has continued to shower us with an easy abundance – more, indeed, than we have known how to distribute with economic wisdom.”

We are facing a healthy economy as well. Unemployment is low. Wages are holding steady. GDP is still growing. Too bad most of this growth is heavily influenced by the credit bubble. Like the former banking president states, this credit bubble mess is another "man made problem" as well. Where this market will take us is anyone’s guess but I’ll leave you with the final paragraph of the article:

“Human stupidity and cupidity were the taproots of this great financial disaster. Those are evils which will always best us. There have, however, been revealed faults and weaknesses in our banking and investment practices that account in part for the extreme nature of this experience. Isn’t it about time that we began thoughtfully to examine some of the fundamentals of our banking and investment theories and methods?”

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American Home Mortgage Halts Trading Pending News: Market Cap Down $221+ Million Over the Weekend. SoCal Still in Wonderland.

According to CNN, American Home Mortgage (AHM) is another company facing issues regarding the subprime fall out:

“NEW YORK (Reuters) -- American Home Mortgage Investment Corp. shares sank on Monday after the home loan provider announced "major" writedowns, delayed a dividend and said lenders were demanding it put up more cash.

Shares of American Home were down 39 percent, falling in pre-market trading to $6.39 from Friday's close of $10.47. On Friday the shares hit their lowest level since April 2003. Trading on Monday was halted for news pending.”

The beating AHM is taking is predominantly on their announcement to delay dividends on their stock. Guess when they announced this. Late Friday! Since AHM knew that if the announcement came any earlier, it would take a beat down like any of the housing related stocks last week. So they let it fester over the weekend and as of this posting, trading has halted on further “news.” But how much market cap was lost over the weekend? We always hear that massive corrections cannot occur over night but really in terms of money, how much was lost? Well let us take a look at some details regarding the company:

American Home Mortgage

Shares Outstanding: 54.28M

Price Per Share on Friday: $10.47

Current Pre-Market Share Price: $6.39

Friday Market Cap: $568,290,000

Pre-Market Cap: $346,849,000

Down in Two Days: $221,441,000

Here’s the thing. All things real estate can go down fast and dirty. Keep in mind this is only one example of many companies. The fact of the matter here is that this company has a market cap of half a billion dollars and is rather large. The disturbing part, as highlighted by the CNN article is you have a company as of the end of March, that had $4.01 billion in “warehouse” credit lines. It is becoming apparent that the subprime contagion is spreading all across the housing sectors.

In reality companies are valued on multiple fronts including their potential earnings or cash flow. For example, say you and I own a company with $40,000 in assets. We decide that we will only have two owners (shareholders) and have two shares outstanding. Therefore each of us would have a “stock” of $20,000 in the company assuming we have $0 in liabilities. Say we expect to earn $100,000 next year in revenue. Obviously the share price of $20,000 will jump up because of the projected earning potential. But what happens should we have negative cash flow? That is what is occurring with these companies but on a larger scale. Of course this is a rudimentary explanation but many of these companies are in similar situations like home owners facing massive resets yet have negative cash flow that they didn’t expect. In addition, your underlying asset gets impacted by negative growth potential. The market is calling it liquidity issues but ultimately it boils down to being unable to pay your bills.

Issues on the Home Front

And then we have stories like this one submitted by a reader of a Ventura Country couple trying to sell their home at bubblicious prices. From the Ventura County Star:

“The Conroys might have aimed high at a time when the market is soft. The most comparable home with similar square footage in the Golf Course Villas had an asking price of $759,000 and sold for $773,500 in October, said Joe Virnig, president of Ventura County Coastal Association of Realtors. He said he believes the same pricing strategy would have been successful for the Conroys.

Doughtery thinks the weekend's event will likely expedite the sale, but not without a cost.

"I think if you want to unload a property for less than the actual value, then this is the way to go," he said.

Still, Virnig warns there must be a catch to this type of marketing tactic, and calls it a "gimmick" to get people to see the house. It's the first time he's seen such a strategy in Ventura County.

"I have trouble believing they'd honor the $594,000 price if that's all they get," he said. "I see all kinds of problems with real estate agents adopting these tactics. I'm not about to adopt it — it's fraught with risk. Until the inspection period is up, it would be difficult to be sure that you didn't end up buying a problem."

You should really examine the entire article but the fact of the matter is we have people stuck on housing bubble yesteryear prices. They are asking $849,000 when a comparable home sold last October for $773,500. Even the fact that they are "entertaining" offers above $594,000, they are still in the belief that they can yield top prices from their rhetoric. In addition, I’m not sure if they are aware, we are in full out suprime and Alt-A meltdown mode therefore limiting access to whacky LaLa land credit. So the pool of buyers is limited in comparison to October of last year. In fact, standards didn’t get tighter until Q1 of this year. So they may look at the $773,500 price and laugh at it, but they’d be lucky to even get that. And the scary part of the article is that there are many folks still looking to jump into the game. Thankfully, I’m sure many of these would be buyers are having issues getting mortgages since they probably don’t have a sufficient down payment and Wall Street is done with the creative financing game. Even in today’s absurd market, all you need is 5 to 10 percent to get top notch mortgage products and rates. Yet with our negative savings rate, this is obviously too much to ask.

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Mortgage Equity Withdrawal Syndrome. The 3rd Rail of the Housing Led Boom.

Unless you’ve been living under a rock, it is apparent that there will be no summer bounce in housing. This comes as a grave shock to those that are entwined like a ball of yarn with the housing industry. We’ve created an entirely new generation of folks that think housing equity equals housing wealth. All of us have anecdotal stories of friends, family members, or ourselves tapping into home equity for vacations, consumption purchases, or using the HELOC to pay off other credit cards. The simplicity of getting money out of your home is so easy it is frightening.

Step one, you call the bank.

Step two, you decide between a home loan or home equity line of credit.

Step three, you get a 2^nd on the home after an inflated bubble market appraisal.

Step four, your off to the spending races.

Sounds rather poetic doesn’t it? But aside from the personal stories, how much money was taken out of homes at inflated prices and pumped back into this economy? The answer may surprise you.

Making Your Home a Bank

During the 1990s, in terms of tapping out equity, mortgage equity withdrawals (MEW for short) were roughly flat for a decade. It was flat for a couple of reasons. The collateralized debt obligations market wasn’t as streamlined as it currently is. This made it more difficult and a longer drawn out process to extract money from your home. The next major point is home prices were stagnant throughout this decade. How are you going to extract money out of a dry well? And finally we have declining returns and world wide investors chasing stronger yields. Keep in mind it was very normal to see 35% year-over-year gains in the technology sectors. Why in the world would you want to invest in housing where over a century of gains have trended with inflation? This all changed after 9/11.

After 9/11, we suddenly saw a progressive campaign of rate slashing to keep the economy afloat. Of course, when you decrease the fed funds rate, you increase the money flowing through the economy. Take a look at the below chart:

As you notice, through the 90s MEW stayed flat. Then we see a sudden quarterly jump in 2001. The tipping point started in the late 90s and early part of the decade because many people started jumping ship from technology investments when most seasoned investors realized that annualized gains of 35 to 40 percent were not going to last. They did what any smart gambler would do, they took their winnings off the table. But here come the stragglers, Joe and Susie public, and go tech crazy. No need to dive into that $7 trillion debacle, but suffice it to say that bubbles do pop. As you will notice from the chart, MEW jumped at a whopping 2 to 1 ratio over the following years. Keep in mind that the bull argument was that money that was extracted from the home was being used to pay off debt and not splurge on consumption. Let take a look at some data from the Fed:

As you will notice, we have a normal progressive growth of public debt from the 1970s to about 2000. Then we see something odd happening. We see the angle trajectory of the chart suddenly shift. Somehow I doubt the majority of folks were paying off debt. If anything, they were consolidating credit card debt, only to reuse the damn things again! Kind of defeats the purpose of debt reduction if you are moving your money from different pockets in your pants and thinking you are richer.

So you may say, what does the Fed have to do with this? They don’t lend the money to the consumers. Au contraire my friend. Just because something isn’t directly related doesn’t mean no change is occurring. If anything, you need to ask yourself where do banks bank? They have standards set by the Federal Reserve and the key interest rate is vital for so many reasons. If they lower rates as they did to the 1 percent range, it makes no sense to purchase US Treasuries long-term since inflation will kill your investment. In addition, since the rate was lowered to a historical low, it actually encouraged people to spend. Many reports have been issued showing that Americans actually have less equity as a percentage in their home than in the past. Begs the question of all this $5 trillion housing wealth we’ve been wallowing in. Well somehow it became our patriotic duty to spend (remember the Bush speech) and folks true to form, went out and spent like a drunken hyena. We save so little, we are actually in a negative savings rate. Think about that for a second. We spend more than we earn! You can only do this if excess credit is in the market. With the advent of MEW and inflated housing prices, folks decided to appoint themselves CEO of the Bank of Home.

What Will Happen when Home Bank Forecloses?

Since the dollar is worth a lot less because of inflation and irresponsible monetary policy, you are now able to purchase less with your current income. Think about the nature of inflation. When you print too much money, you devalue the worth of the current money supply. This is basic economics. What makes something valuable? The amount and scarcity of an item in relation to the demand. Money for a few years was so cheap, it made no sense to save and the public followed. The leaders of this consumption used every advertising medium available. If you drive a two year old car you simply were an old school idiot with no taste for the finer things in life. Have you noticed those credit card commercials where the person paying with a check or cash is seen as a leper? Everyone is having a merry time paying with their Visa and Mastercard but god forbid you show cash you dirty rotten animal. How dare you stop the flow of credit to the rightful owners of consumption!

But you can only spend so much and grow an economy on pseudo-wealth. Eventually someone will have to pay for it. And at a certain point, there will be no more money left. Take a look at the below chart:

Source: http://calculatedrisk.blogspot.com/

You’ll notice that suddenly as we hit the housing peak in 2005/2006, MEW dropped off the map. Why did this happen? For one, housing is correcting and coming back down to Earth. Another reason is the Fed was forced to tighten credit standards, otherwise we were on our way toward paying for orange juice with wheel barrows of dollars at Ralphs.

So the perma bull arguments are absolutely false. Housing was artificially inflated by investors looking for higher returns, a Fed that dropped rates faster than muscle growth in the MLB, and finally a society that is based on 70 percent consumption. If you read your history books, you’ll find many great empires collapsing because of massive deficits. However, this is a worldwide glut in credit so this will impact the entire planet. Have any doubt about the bubble? Take a look at these 10 homes and then come back and let us know your thoughts.

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Mortgages 101: Rule #1, Read your Mortgage! Riding the Mortgage Default Wave.

News flash. No summer jump for housing. I’ll give you a minute to recover from the shock of this surprising update. And in other news, people don’t read their mortgage applications before signing the dotted line. In this weekend’s LA Times and another article from the Washington Post, some startling data is released regarding mortgage borrowing. A Federal Trade Commission study took a sample of 819 prime and sub-prime mortgages borrowers in 12 locations around the country and found:

· 90% of borrowers could not identify the correct upfront cost associated with their mortgage.

· Two-thirds didn’t realize they would get hit with penalties if they refinanced within two years.

· 80% had a hard time understanding why the APR was different from the loan note interest rate.

This is absolutely startling because the data gathered came from prime and sub-prime borrowers. The sample size is also significant because it shows a decent representation of what is occurring in the current marketplace. I find it fascinating that those in the housing industry seem to take no issue with the above numbers. The line in the sand is being drawn. On one side, you have resolute bears that will refuse to pay current prices and are waiting for prices to reflect market income and rental rates. On the other end, you have housing bulls crying “personal responsibility” regarding buyers and echoing a continued growth in real estate appreciation. I can see both sides of the argument. However, when you have housing bulls saying a buyer knew what they were getting into and therefore are directly to blame (the above data shows they did not know what they were getting into), this pretty much shakes the foundation of their argument. After all, now that we factually know the vast majority of buyers do not know even minor details of their mortgages, do we continue turning a blind eye to this financial negligence?

What about personal responsibility for the mortgage industry? I guess they see it as a one way road. We have the mortgage industry committing outright consumer fraud and malfeasance by placing borrowers into homes they know that sometime down the line, they will be unable to afford. In some cases we are actually having lenders taking borrowers out of fixed conventional loans and placing unknowing buyers (aka see aforementioned borrower stats) into risky interest-only or other exotic mortgage products. Somehow this seems okay. And we wonder why foreclosures are rocketing up to the moon? Some would like you to believe that a trillion dollar mortgage industry should be held to the same standard as a financially irresponsible buyer making $25,000 a year getting into a $500,000 Real Home of Genius. You&#