Frying Pan into the Fire
Regular readers may be aware that frequent (and talented) contributor Bernard Ducalion has been enlisted as a Wall Street Examiner blogger. He recently parsed an article that points out a key variable about foreclosures, namely that it is falling home prices more so than rate resets that are the causa proxima of foreclosures. Of course this is a pony and cart situation as rising prices enabled the credit to be extended on dicey terms in the first place. As the unsustainable asset Bubble crested and rolled over, so did the dicey loans. So it is credit conditions that matter here, that being the ability to get a loan or mortgage on good terms, let alone dicey cheap terms. However, if the underlying collateral is fictitious (causa promixa) then so is the condition of the credit extended. They are linked in a death embrace. It would seem the strategy from the Wizard of Oz crowd is to restore or perpetuate dicey credit and thus stem the bleeding of inflated assets. But the primary bouncing ball to follow is the underlying asset value.
Following on this theme come some great charts courtesy of Contrary Investor, one of my favorite sources. Here we can step back and look at the US asset Bubble in context over time, and see where we are now. The first chart shows household house and stock assets as a percentage of GDP. The logical question to ask: do the income streams and production of the US economy support this asset level? It would appear that relative to past averages about one-third of the value of these assets is fictitious. Perhaps even more if GDP starts contracting as fallout from this asset destruction.
Here is asset inflation from another angle:
Next we get a great chart that shows the support for these fictitious prices, that being new credit growth growing well above even the inflated asset Bubbles, which in turn are inflating far faster than the underlying economy. In the current decade about twice as much. Thus any disruption of credit conditions and availability and economic growth will disrupt asset bubbles, multiplied.
Next from the 3Q data on mortgage cash outs we find more support for Bernard’s home price thesis. Notice here that although mortgage equity withdrawals (MEW) in general are down, homeowners with older mortgages that supposedly have more equity can still go to these financial institutions and get new mortgages. No credit crisis here, not yet that is. If you have a mortgage originated in 2005 or 2006 when home prices are down, you are shit out of luck, but show up for a refi with a 2003 mortgage with some supposed equity ingrained, and the banks are more than happy to jump from the frying pan into the fire with you. And what is the more sound collateral, the 2003 and 2004 vintages, or the new 2007 vintage? Just replacing mediocre securities with poor ones, it looks like. More fuel to keep the foreclosure train going.
The supposed appreciation of these four year old (since last loan) properties and mortgages is 25%. Oh, is all I can say.
Lending support to Bernard’s theory that rates are secondary, almost all of these borrowers are paying a higher rate on their new mortgage than on the old one!! Let’s do the math: old mortgage 6% x 112% = about 6.7%.
And whatever equity they supposedly have is also being borrowed out (cashed out) as well.
Don’t think this matters?
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