Jim Cramer of theStreet.com spoke last week about the spreading subprime-triggered disaster in the financial markets. Actually, he didn’t speak. He ranted and yelled saying he, a former hedge fund manager, is currently getting dozens of calls a day from hedge funds and trading desks saying, Jim, you have to tell people how bad things are now, to counter the smiley faces who are say the crisis is contained and all is well. He did just that, screaming that Bernanke of the Fed is clueless and that things are getting desperate. Financial Armageddon isn’t coming, he said, it’s already here.
During the height of the dot com boom, when many thought the bubble would go on forever and we’d all retire zillionaires, I remember Cramer screaming, people, take some money off the table. Take some of your profits and put them in t-bills or something safe. Don’t keep trading with them. Doubtless, there are many who wished they’d acted on that advice.
If Cramer is right, and I think he’s certainly more right than wrong, then what’s coming will rattle all of us and have repercussions for quite some time. EZ credit is dead. Home mortgages will become unavailable to many. Business will slow down. Municipalities will see greatly decreased revenues because of defaults on property tax and and less sales tax revenue (because people are spending less.) A recession, maybe worse, seems a virtual given.
Here’s an example: Loan insurer ACA Capital may be toast – Barron’s
ACA Capital is leveraged 180-1 on loans they are supposed to insure. (How can it possibly be said they are insuring anything with insane leverage like that?) Apparently, big investment banks “used the company to move billions of dollars in risky, volatile loans off their books.” It just blew up in their faces. Because ACA was leveraged to such an extreme level, just a 7-10% drop in what they insure could wipe them out – and actual drop could easily be more than that.
This means the investment banks may have to eat their toxic loans, with no insurance to save them. “Barron’s says, losses could be $3 to $5 billion.” And because the investment banks are leveraged on their portfolios too, this could trigger further catastrophic losses.
This is precisely what Cramer is talking about. Sympathetic detonation. One explosion triggers more explosions.
This almost captures the hilarity of Cramer’s Microsoft track record: http://www.stocktagger.com/2007/07/jim-cramer-microsoft-corporation-msft.html
[…] wife Sue read my Jim Cramer meltdown AKA Armageddon post yesterday and jokingly (I think) said, “Armageddon is coming? We need to stockpile food, […]
YOU GO JIM…..Tell it like it really is….. Smell the coffee folks and ask. What started this whole mess in the first place. It was the Damn Democratic Government Regulators (DDGR’s) who stepped in and imposed regulation which shut off the flow of dollars to the subprime market. They did this all under the guise of “predatory lending, Fraud†and “High Foreclosure Rates†The fact is the exact opposite was true, mortgage backed bonds and the housing market as a whole was making tons of money. Tell me, do you see a problem with a very a low foreclosure rate in an up trending real estate market, a market in which the value is more than the foreclosed loan amount? The DDGR’s only goal is pop the housing bubble and to take control over the entire trillion dollar mortgage market through FANNIE MAE and FHA. It is the DDGR’s who are Predatory, Fraudulent and Reckless in there wanting control over the mortgage market. Their actions have cause a self fulfilling prophecy, they will only burn the place to the ground if people don’t wake up and put a stop to it. It’s because of their reckless actions a lot of good American people will wind up paying the price. Mean while we are spending billions to build homes in other countries? Learn to read between the lines people and stop allowing the government to protect you from yourselves.
Recently, Countrywide has been offering to modify loans for customers who have negative-amortization loans. These loans allow the customer the option of making mini-payments for the first 7 years. The mini-payments do not cover the monthly interest or principal–so the loan balance due increases if the customer chooses to make only mini-payments each month. Countrywide has offered to modify this type of loan, because these they are becoming riskier to Countrywide as property values decrease.
For example, in one case, the customer originally borrowed $1.2 million; they have been choosing the ‘mini-payment’ option, so their total loan balance has increased to $1.4 million. Property values in the area have decreased the home’s value from $1.5 million to perhaps $900K quick sale value. So the bank is continuously offering to switch the customer to an attractively low, fixed rate product (with no additional underwriting, no additional documentation and no refinance fees). It is offering to do an in-house loan modification to a fixed rate product. It’s doing this to protect itself from accumulating increased debt on an asset with declining value.
We have all seen the damage that the adjustable rate mortgages have done to families and to investments tied to mortgage loans. So my question is, if lenders can do in-house loan modifications for “negative-am loans” to protect themselves against capital loss, why can’t they do this for the “stated income” or “no doc” adjustable rate mortgage products? These loan products are currently ticking time bombs for homeowners, lenders and the general economy. Lenders should simply recall this mortgage product or they should be compelled to do so. It is obvious these loans were not feasible mortgage products.
Lenders should provide in-house loan modifications across the board and convert these loans to the currently available low interest rate fixed-rate products that do not threaten to implode and put the borrower, the lender and the general economy at risk. Are they so desperate for the loan fees that they will make on refinancing a portion of these loans, that they are willing to let the general economy continue to implode? Aren’t we at the point where HUD or some other government agency can step in and demand a recall and modification of this loan product, if lenders won’t do this on their own?
I agree with the recent CNN commentator who stated that we cannot wait for an election to solve the housing crisis…the economy is already pretty far gone. We need leadership in the Congress and Senate, now, not a year from now when someone new is elected. I realize the campaigning Senators have a heavy burden of engagements which requires superhuman efforts; however, I hope you will find the time and stamina to lead on this issue. This visible effort would be very meaningful on the campaign trail–perhaps more meaningful to people than going to town halls and saying the same things over and over that anyone watching the news has already heard.
I have worked in the mortgage industry since 1998–mostly as a mortgage production manager–so I saw a wide scope of loans coming into lenders from CA, AZ, MD, DE, MA, FL and most other states. I appreciate some of the solutions put forward; however, I want to relay an ‘industry insider’ opinion of problems I see with the proposed solutions. Some parts of the industry I know well, and other aspects I’m not so familiar with, so I hope you will use whatever part of this information may be useful. I have reviewed documentation in countless mortgage files, many of which were “stated income†or “no ratio†loans. Since it is very hard to get anyone’s ear in this democracy of ours, I would be content to just sit back and wait to see the proposed solutions not work, if I thought that the economy could bear it.
§ FHA refinances mostly won’t work to prevent foreclosures due to the currently depressed property values. (FHA will only finance 98% of current value; with significant program fees rolled into the loan. Many homeowners are currently around 130% on average)
§ FHA refinances won’t work for many Borrowers who cannot document their income, but who have made their payments until they reset to untenable interest rates
§ Forcing homeowners to go through bankruptcy court will take too long, will bog down the courts and will not allow for a rapid recovery of property values.
§ What is needed is a speedy recovery of property valuesâ€â€in order to secure investments tied to mortgages and to restore overall consumer confidence.
§ Adjustable rate mortgage (ARM) loans with teaser rate introductory periods should be recalled by HUD and modified by Lenders to 30 or 40 year fixed mortgages at the current market low rate of approximately 5.375%–which is close to the intro-rates that most borrowers were paying without issue and still provides lenders with reasonable loan profits.
§ Mandated Lender in-house loan modifications (which require no changing of Lenders, no new investment pools, no auctions and no additional underwriting) can be done across the board IMMEDIATELY. This will allow people to maintain a regular, affordable mortgage payment, without being rejected by lenders for various reasons or raked over the coals and given another bad deal for additional lender profit. A bad deal which may or may not performâ€â€with greater potential to foreclose and create further instability in property values and mortgage backed investments.
§ With decreased home inventory and stabilized homeowners, there will be reliable income backing mortgage investments and property values should recover.
§ If security rating agencies require, HUD should work with lenders to guarantee these modified loans.
§ People who were already foreclosed out of their primary residence should be able to transact a one time home purchase with minimal underwritingâ€â€simply by providing proof of qualifying income. This will get borrowers an affordable deal with the current low home pricesâ€â€and this will help to get the excess home inventory off the market and stabilize real estate prices. The alternative is that these people should seek legal action against lenders for putting them in imploding mortgage products and against HUD for a lack of regulation and oversight. By allowing them to regain their status as homeowners with a reasonable, fixed mortgage rate, the homeowner will forfeit any right to legal actionâ€â€and they will no longer have a reason to pursue it.
§ Going forward HUD should regulate mortgage products, so that they are not potentially causing widespread market instabilityâ€â€by suddenly jacking up payments on people. Perhaps home loans should no longer be granted on a “stated income†or “no income documentation†basis. The unavailability of this kind of financing should keep home prices from rising precariously.