& MORTGAGE FAILURE AVALANCHE
by Jim Willie CB
Editor, Hat Trick Letter
December 12, 2007
An avalanche comes in 2008. Its wreckage will hit both the USEconomy and banking world. The greatest deception in the bank sector this year has been the misrepresentation of the mortgage debacle as a subprime problem. That is akin to calling an iceberg only a problem for what one can see, when 90% of its mass lies below water. Ice is lighter than water. Most mortgage bonds are like acidic stones weighing down bank and investor balance sheets. Wall Street and the USGovt con artists, using tools are fraud and distortion, prefer the public and investment community to think of the �Subprime Problem� as the source of distress. On mortgage bonds, collateralized debt obligation derivatives, structured investment vehicles, all dominant in the news, reports constantly stress how the problem is traced to subprime mortgages to all those unworthy home loan borrowers who never should have been given such loans, even at higher mortgage rates. The systemic threat, both to the US banking system and USEconomy, has entered a new stage. The remedy addressed is sure to force the USDollar lower and the gold price higher, to occur in the next gear. Breakouts are coming which will seem to lose control, like what was seen in September and October.
OF DESPERATION & FIRE TRUCKS
Official policy in reaction to the USEconomic threat of recession will spill money into every corner and crevice. Gold and mining stocks will benefit. My forecast stated all summer long is that the USGovt maestros will gradually introduce increasingly broader rescue elements, since everything they try at early stages will fail. The USFed remains badly behind the curve, as yesterday they cut the official Fed Funds target rate, but did not sufficiently cut the Discount Window rate that imposes a Stigma Tax. Today, the USFed announced a much broader bank liquidity policy, focused upon more auctions at set rates and a swap line with the Euro Central Bank. They have announced more coordination with the Bank of England, the Bank of Canada, the Swiss National Bank, and the US Federal Reserve. This is part of my forecast. They must have been working all night long.
By summertime 2008, the requirements for a grandiose Resolution Trust platform will be etched more clearly. The key to the gold price lies in two spots: 1) massive monetary inflation to treat the banking problems and prevent recession, 2) realized price inflation in a manner lacking disguise. John Mauldin uses the metaphor of fire trucks being called to the scene. The USFed has been amazingly shamefully slow in recognizing the problems. Stuck in their stupid �inflation versus growth� framework mindset, they miss both the interbank system seizures and home mortgage avalanche coming outside the prime mortgage corral.
The threat to the banking system will be staggering. The threat to the economic system will be broad and deep. The avalanche will expose the combined system as insolvent, broken, in need to total rescue. The damage will necessitate rescue platforms to undermine the entire US$-based monetary system, certainly sufficient to lift gold well past the $1000 level. By the time 2009 approaches, the system will be recognized as totally broken. The new question will be whether that system can indeed be repaired. As measures put in place and debated for consensus approval, the urgently demanded movement should be the particulars on the new Resolution Trust Corporation. The desperation no longer hidden (like on Bernanke's face) will lift gold well past the $1000 mark. The impetus behind the gold price will turn to inflation much more than the US$ counter-lever. All major currencies will be inflating heavily, as seen in recent central bank decisions either to cut official interest rates or to hold steady. Major currencies will begin to be compared in a manner to judge which ones are weaker as they are undermined during stimulus to discourage economic recession and credit flow interruptions.
The new 2008 year will smash that notion, as an absolute avalanche of failed mortgages will slam the bank system and financial sector in general, the majority being prime mortgages. SHOCK & AWE IS RIGHT AROUND THE CORNER ON PRIME MORTGAGES, A FACT THE BANKERS ARE KEENLY AWARE OF! The villainous failed mortgages have a few traits in common. These primes are adjustable rate mortgages (ARMs) with harsh resets. They contain destructive features certain to cause as much pain as laughter for their insanity. Recall they are prime mortgages with lax features resembling subprime loans without the higher rates. A reaction to the incredibly flimsy inadequate Subprime Mortgage Freeze Plan, with dire descriptions of the prime mortgage avalanche can be found in the December special report to the Hat Trick Letter, entitled �National Bailout & Looming Mortgage Disaster.�
Only 150 to 225 thousand subprime mortgages will be addressed by this flimsy HOPE NOW freeze plan, and nothing among the looming prime mortgages heading for certain default. The innovative mortgage products face ruin. Large cross sections of newer mortgages, written since year 2000, are under-water badly. Their loan balances are much greater than their home values. THE NEW PHENOMENON IN 2008 IS RECOGNITION OF ZOMBIE LOANS, ZOMBIE HOMEOWNERS, ZOMBIE CONSUMERS, AND ZOMBIE BANKS. They are bankrupt without declaration; they are walking dead. An added footnote is needed to this auxiliary HTL special report, tied to accusations of fraud by large mortgage bond investors, both in the United States and foreign institutions.
MOTIVE: AVOID LAWSUITS & FORCED BOND BUYBACKS
The threat of court-ordered forced contractual bond buyback by Wall Street con artists is nearing a reality. If investors engage the Wall Street banker broker dealers in the renegotiation, refinances, and workouts, then those institutional investors will lose the right to sue Wall Street firms, and lose the opportunity to force fraudulent bonds to be bought back at perhaps ten times their current traded prices. Wall Street, given its Fascist Business Model connection with the USGovt, has enlisted Congressional help to place �Safe Harbor� obstructions to lawsuits, thus absolving the criminal activities perpetrated by Wall Street. The gaggle of Wall Street firms engaged in packaging mortgage bonds, ensuring they contained a �AAA� false label, colluding with key agencies to misrepresent the sale of securities, has made a bold move to freeze troubled mortgages, and to dupe/lure investors into the process. If they take the bait, they lose the opportunity for remedy on hundreds of billion$ in fraud-ridden bond losses. My contention made for over two years is that the USGovt and Dept Treasury and Wall Street and numerous major icons in the United States embody institutionalized dishonesty. That perception is much more clear in 2007. Legal address and remedy of that institutionalized dishonesty might come in 2008.
Wall Street and other major bankers continue to soil their pants. They realize several looming tragedies:
- Prime �AAA� mortgage bonds have lost roughly 20% of value
- Innovative flexible adjustable mortgages are due to default in droves
- Enormous growing list of under-water mortgages are beyond rescue
- Big banks are facing dire insolvency threats, as new defaults approach
- Enormous bond writedowns have only begun for big banks
- Insolvency can turn to bankruptcy with more debt rating agency downgrades
- Mortgage bond investors contemplate lawsuits, accusing Wall Street fraud
- Wall Street banks face the prospect of over $1 trillion in mortgage bond buybacks
- Rescue & remedy will trash the USDollar and catapult the gold price
As a preface, one should know that politicians did not advance this plan. The key initiators of the HOPE NOW project were three banks. It was an alliance led by the Federal Deposit Insurance Corp (insurer of banks), along with big banks and their lobbyists from Citigroup, JPMorgan, and Wells Fargo. These banks in my opinion are insolvent, soon to be forced into bankruptcy as the next round of the mortgage debacle unfolds from the �innovative� adjustable and option laden mortgages. They all face bankruptcy, insured by the FDIC. If lawsuits are filed and that road is traveled, declared bankruptcy is assured. The rescues to save the Ruling Elite will lift gold and trash the USDollar, as much from a new unprecedented round of monetary inflation, as from destroyed image of the US financial system. Freezes never work. When in college, my memory is vivid of the lunatic Nixon Wage Price Freeze. When it lifted, the price inflation rampage was the worst in modern history. My suspicion is that when any mortgage freeze is lifted, both mortgage rates will rise sharply and mortgage bonds will fall sharply in value.
Few have bothered to think about the infectious disease of moral hazard, to consumer and household reactions. Many economic participants will feel left out with the current rescue, against a backdrop of watching colossal fraud go unpunished. They will possibly act destructively, an intentional effort to destroy their credit rating so they can participate in national bailouts. Many live in homes with negative home equity. They might feel above the rules, immune to impact of their actions, engrained in destructive habits, feel powerful from a reprieve, want to be included, or just not care. They will feel they have nothing to lose. The likelihood that property taxes will be paid, water & sewer fees paid, lawns mowed, hedges & trees pruned, garbage removed, broken windows repaired, holes in walls filled, driveway cracks filled, shingles straightened, liens on the property resolved, these are all in doubt in my book. Pride in ownership will turn ugly, into a free ride game. Practicalities are strained to the extreme. A zombie comes to learn to act with disregard, disrespect, and disobedience. Henry David Thoreau wrote �Civil Disobedience� almost two centuries ago in response to the Spanish Civil War, yet another false flag self-inflicted attack. That was done to the USS Maine vessel off the Cuban coastline. Expect such disobedience to be practiced widely in reaction.
NOT A SUBPRIME PROBLEM ANYMORE
If �AAA� rated mortgage bonds have lost 20% already, this is not a subprime problem anymore. My contention is that many �AAA� bonds are likely to lose over 50% of their value, as home collateral value drops another 10%. Wells Fargo announced a whopping $1.2 billion loss from prime second mortgages recently. Remember how people could borrow their entire down payment with an immediate 20% second mortgage out of the gate? Well, they are failing, with Moodys estimating 15% of them to fail. That is on par with the horrendous subprime default rate. The E*Trade bond loss writedowns were not subprime. After taxes and cash infusion is removed from Citadel Investments, the E*Trade fire sale salvaged only 11 cents per dollar on their $3.1 billion prime mortgage bond portfolio. The liquidation damaged the entire market by exposing its low value. This is not a subprime mortgage problem anymore. The debt ratings agencies writedowns have entered a second gear, with some acceleration. They are not only downgrading massive bank portfolios, they are threatening to downgrade the bond insurers such as ACA Capital and MBIA, as well as others. What is a house or business worth when it cannot be insured due to faulty structures? NOT MUCH!
FASCIST BUSINESS MODEL ENTRENCHED
However, here is where the real damage comes, as an extension of the Fascist Business Model.
The sickest and often most fraud-ridden banking entities will receive fresh new money, possible USGovt handout infusions. The failures will be rewarded, leaving the successful, honest, competent to struggle or to go begging. Banks will issue fewer prime mortgages. The plan will force extreme focus on subprimes, ignoring primes. Banks will be forced to hold back on funding new loans since old loans must be addressed. In the process, their plan will very possibly accelerate the downside for housing prices. Home inventory levels will continue to rise. Sellers will not find willing buyers so easily capable to make final their loans. The lending institutions in general will be rendered less inefficient. The most glaring example of this principle will be the capital funding of Freddie Mac and Fannie Mae. F&F are failed institutions with broken apparatuses, having operated for years without disclosure, but will dominate the national program if our current leaders have their way. Instead, new financial entities should be created, not revival of broken entities. Inefficient capital usage will be the main feature of this plan.
In my opinion, THE FINANCIAL SYSTEM HAS OFFICIALLY ENTERED CHAOS, with that chaos more widely recognized in year 2008. To be sure, it is an early stage. Massive housing losses have occurred. Even more massive mortgage bond and related credit derivative losses will occur. Rewards are being prepared for the most reckless of participants. Encouraged destruction of credit and credit ratings is possibly around the corner, so that marginal households can participate in freezes, bailouts, or whatever is handed out. Subprime loan failures are the tip of the iceberg. In 2008, the breakdown of numerous other types of mortgages will occur, already in their initial phase. They are NOT subprime mortgages. The mortgage finance sequence of boom, bubble, bust is entering the third stage. Prices for housing properties will revert at least to where they were in 2001 when the insanity began, which was actively encouraged by Greenspan. History tells us that. His fingerprints are everywhere. All subprime mortgage bonds will go to zero in value. All CDO bonds containing subprimes will go to zero in value. All prime mortgage bonds will lose at least half their value. If the national decline in home prices falls over 10% to 15% more, then almost all recently issued prime mortgage bonds might possibly head to zero in value. Few talk about the next destructive factor for mortgage bonds.
Ultimately, a minimum of a $2 trillion bailout is necessary, as mortgage bond losses will be at least that high, especially when considering the leveraged CDO bond losses. The new bigger broader Resolution Trust Corporation must be created as soon as possible without delay. Urgency is here and now. The system is in the process of degradation, sure to lead to some increased disorder. The changes will be similar in England and possibly to some degree Spain, because they went overboard on real estate speculation. England built an economic dependence upon an inflated housing sector. Spain permitted uncontrollable vacation property speculation. Be sure to know that Wall Street firms are in charge of the solution to a disaster that they themselves perpetrated. Wall Street firms will want to be in charge of the bailouts, even the Resolution Trust Corp. Wall Street firms will want to be involved in the grotesque bailouts, since so much corruption and opportunity will be presented. Like the parasites they are, they sense gain. Think Halliburton and the Iraq & Afghan Wars, with profits abounding to insiders on cozy contracts. Think contractors in New Orleans and Hurricane Katrina relief. Think the next RTC administrators, with more huge profits. To even consider the fraud-ridden Freddie Mac and Fannie Mae for serving as the foundation financial agency for secondary market reinvigoration is a travesty. It is a blatant endorsement of the entrenched Fascist Business Model.
FAILED INNOVATION IN MORTGAGES
Anyone who believes the mortgage debacle is limited to subprime loans and bonds has bought hookline & sinker the story trumpeted by Wall Street and the larger banking community. The risk pricing model has broken, with authorities determined not to have the story properly. Instead, it is framed in friendly terminology, distorted to the public and the investment community. The world of bizarre reckless adjustable rate mortgages (ARM) is soon to suffer a publicly visible and horrible implosion. The aftermath of irresponsible 0% down payment mortgages is soon to suffer implosion. The innovative creative flexible mortgages are soon to suffer implosion. No documentation, no income mortgages, unimaginable in normal cultures, are soon to suffer implosion. A vast world of under-water mortgages exists in the United States, soon to suffer implosion. The abuse of second mortgages and home equity loans is soon to suffer implosion. The main focus of attention will be on California, the center of innovation and creativity. Think the American Home Dream turning to a Ball & Chain toward serfdom, the New American Nightmare. Many details are provided in the Hat Trick Letter Special Report.
The key theme with innovative adjustable mortgages is their zombie nature. Resale is hindered, as is refinance, since the property is vastly under-water, loan balance greatly exceeding the home value. A return to similar mortgage loans is impossible, since they no longer exist. A loan rate freeze is a certified prescription for another zombie loan and zombie home title owner. Particular gratitude goes to ScottM in Seattle and that anonymous San Francisco mortgage broker who offered details after his personal experience in approving over $2 billion in mortgage loans himself. His information is appreciated, and needs to be made more public.
Negative amortization mortgage implosion. This type loan has permitted home title owners to pay less than the appropriate interest amount, thus adding to the loan balance. When the loans hit their maximum negative potential allowance, a huge increase is forced which could result in required monthly payments not 20% to 35% higher, but 100% to 200% higher. The full interest requirement kicks in, based upon the full loan balance, having risen. Imagine a $1400 monthly payment shooting to $2800 or $4000!
Prime second mortgages implosion. This type of loan enabled a huge number of home title owners to effectively invest 0% down payment in their original purchase. Many lending institutions have cut off further withdrawals from the home equity source, in a lockdown much like applying a tourniquet to a bleeding limb. Wells Fargo once boasted this spring not to be involved in subprime mortgages, but they possess $84 billion of these worthless loans. Expect Wells Fargo to go bankrupt. The bankrupt banks will not just have Wall Street addresses.
Pay option adjustable rate mortgage implosion. Called �Option ARMs� in the finance industry, this category will make national news for their insanity in negative amortization features. In volume, they will greatly eclipse the subprime story, since the loan type involves all risk levels of borrowers and all sizes of properties. Again, this feature enabled many people to buy far too large a property. Shocking statistics are cited in the special report, pertaining to these truly reckless loans. Bear in mind that homes have fallen in value, so underwater percentages in extreme cases of these loans might be more than 25%! Analysts estimate that on many of these Option ARM loans, home title owners are underwater by 15% to 20%. Many of these loans have seen their balances rise by 7% per year for at least three years. These loans are more disguised subprimes. The negative amortization features act like a timeduse to explode, in a situation offering no hope of refinance, no qualification for other loans, and no equity. They will go bust.
Hybrid interest only adjustable rate mortgage implosion. The hybrids attracted borrowers by offering a fixed low introductory teaser rate for a fixed three, five, or seven years. After that period, they adjust annually. Again, this feature enabled many people to buy far too large a property. The 3/1 (3-year fixed, adjust every 1 year later) began to reset in 2006, with many more in 2007. The 5/1 will begin to reset in 2008, causing a nightmare. Many lenders offered Hybrid ARMs to lower quality borrowers. Plenty such loans did not require income verification. Like the Option ARM, the low teaser rate caused the loan balance to rise during the introductory period, thus leading to vast number of loans being under-water. Again, refinance or new mortgage loans will not be approved. They will go bust.
The downtrend in housing prices generally might actually motivate banks and other lending institutions not to make more home loans. A tidal wave of foreclosures comes soon, not related to subprime in any way, with California at the epicenter. Mortgage bond holders of above described abusive INSANE mortgage loans packaged into bonds will suffer massive losses. For some, like Option ARMs, no bond market exists anymore. The banks on the other hand will suffer from the tidal wave of loan losses, much of which is deserved. My only hope is that Wall Street banks suffer their fair share of the pain. Home property values in some metropolitan areas are likely to fall by 30% to 50% from peak, taking them back to 2000 and 2001 levels. THE ONLY SOLUTION IS UNTHINKABLE, A NATIONAL BAILOUT OF THE MAJORITY OF HOME MORTGAGES AND MORTGAGE BONDS, SINCE THE ENTIRE SYSTEM IS BROKEN IRREPARABLY.
The effect on the USDollar and gold price is uncertain, but surely negative for the clownbuck and positive for gold. As Persian Gulf oil producers watch in horror, they will be increasingly motivated to cut their US$ formal currency pegs. The upcoming US mortgage debacle will kill the USDollar as the recognized practiced endorsed world reserve currency, with the abolition of the defacto PetroDollar standard certain. The gold price will rise amidst the absolute hurricane of low pressure asset deflation and colossal monetary inflation to fight it. THE GOLD PRICE IS CONSOLIDATING NEAR AND ABOVE 800, A DISPLAY OF STRENGTH AND RESILIENCE.
My dire forecast for 2008 is that the USDollar DX index will find its way to 65 and the gold price will find its way to $1200 per ounce. A 10% to 15% decline in the USDollar comes. A 30% to 50% rise in gold comes. The positive rub to investors is that as the national emergency becomes more widely recognized, the need to flood the bank & bond arenas, as well as the corporate credit & household arenas, will become broadly understood as desperate. Without that flood, the system will enter a deeper economic recession than already is in progress. Without that flood, the system will see the banking system actually fail.
© 2007 Jim Willie, CB
Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a Ph.D. in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com.
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