Category: Housing Crash

E*Trade Likely to Go Belly Up

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It’s been a tough day for them. E*Trade shares are down 57% today, following the announcement Friday that they had significant exposure in mortgage backed securities. (I covered it here)

One analyst says that it is 65% likely that they will go belly up.

E*Trade is claiming that it will remain solvent with “an immediate write-down over $1 billion”. Given that has a “$3 billion portfolio of asset-backed securities”, it would seem unlikely, except for the fact that no one actually knows what they would sell for. There is no functioning market for these vehicles.

Sandler O’Neil analyst Richard Repetto said investors should no longer buy E-Trade stock, but said he doesn’t believe the firm is facing the worst-case scenario others are forecasting. He added the firm isn’t likely to have to take the more than $1 billion in losses needed to hurt its “well capitalized” standing, unless credit issues spread to the portfolio of prime asset backed securities or home equity loan performance “materially worsens.”

And there is the rub. Everyone believes that the credit issues will spread, and that home equity loan performance will tank.

If you have more than $100K in E*trade, I would suggest that you get out. Under that amount, you are federally insured.

New Bankruptcy Law Hitting Banks in Mortgage Portfolio

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You may recall that the banks got a law passed a few years making it harder for people to discharge credit card debts.

Well now, this is one of the factors behind the explosion in defaults and foreclosures.

Washington Mutual, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. spent $25 million in 2004 and 2005 lobbying for a legislative agenda that included changes in bankruptcy laws to protect credit card profits, according to the Center for Responsive Politics, a non-partisan Washington group that tracks political donations.

The banks are still paying for that decision. The surge in foreclosures has cut the value of securities backed by mortgages and led to more than $40 billion of writedowns for U.S. financial institutions. It also reached to the top echelons of the financial services industry.

Economic Update

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Well, the economy logged a brisk 3.9 growth rate, which is pretty stellar, particularly since it would have been about 1% higher if the housing market were not tanking, but still, the Fed cuts rates by 25 basis points.

Maybe they know that there is some level of bullsh&% in the figures that they cannot trust.

In response, the dollar tumbled. The Canadian dollar bought more than $1.06 for the first time since 1957, the Euro broke the $1.45 barrier, going to $1.4503:1.0000€, and the Sterling is now $2.0813:£1.0000.

I said that the dollar would break through $1.50:1.00€ before year’s end, and I stand by that.

As to the Chinese Yuan, it doesn’t move as much, as it it still partially pegged to the dollar,

but it has risen by about 10 % since it became more loosely pegged about 27 months ago.

I expect a run on the US dollar sooner, rather than later, perhaps before the 2008 elections.

Housing Crash: Ohhh!!!! Look at the Pretty Pictures

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Calculated Risk has the following pictures:


The total number of California notices of default


And these are notices of default as a percentage number of houses in California.

Both ways, it’s the highest ever, with about 1/30 ownde occupied houses in default. Not pretty.

The San Francisco Chronicle also has some pretty pictures:


Foreclosures are skyrocketing.

Seeing as how pictures are worth 1000 words, I think that I have written enough.

U.K. Home Prices Decline for First Time in 2 Years

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This subprime mortgage default and derivative thing is not just effecting the united states. They have already had what amounted to a bank failure, Northern Rock Plc, and the Bank of England raised its rate to 5.75% in July so the era of easy money in British real estate is over.

Seeing as how a lot of Brits have been bidding up properties in places like Spain for vacation homes, this contagion will spread.

The only place possibly innoculated against this is Japan, since they just finished a 15 year long real estate crash.

Mortgage Losses Worse Than Previously Believed

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It just gets better and better.

It not appears the Merrill Lynch will take losses of at least $8 billion, up $3 billion from a few weeks ago, they are predicting 2 million foreclosures, 4x the estimate of the Bush administration, and housing inventories are at their highest in 20 years.

This neglects the fact that it’s not just subprime though, so it will get worse.

This has been todays bit of sunshine.

Mortgage Resets Will Be Getting Even Scarier

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Here is the chart:

As the folks at calculated risk explain, the subprime resets will be done with in a year or two, but then the Alt-A and Option ARM mortgages kick in.

Alt-A may not be that bad, it’s basically the bottom end of prime, kind of like being slightly pregnant, but the Option ARM mortgages are a different story. A lot of these folks are paying the minimum, which means that they are going deeper and deeper into debt as we speak.

This will get uglier before it gets better.

US loan default problems widen

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Banks are continuing to take losses and write down loans.

Poor quarterly results from banks across the US over the past two weeks suggest credit problems once confined to high-risk mortgage borrowers are spreading across the consumer landscape, posing new risks to the economy and weighing heavily on the markets.

This is not a problem limited to one portion of the market. It is wide spread, and it is systemic, driven by the Fed’s, specifically Alan “Bubbles” Greenspan’s, decision to create a credit bubble to address the dotcom meltdown of 2000-2001.

Too many people owe too much money, and much of this money should never have been lent out in the first place.

Lenders in La Now Slashing Prices to Unload Foreclosed Properties

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This is no surprise. The question is never been whether this would start, it has always been where, and when, and how much, and how fast it moves across the country.

There are very few places in the country that will be untouched by the real estate meltdown, and now the first three questions have been answered, and the 4th question is in process:

On average, a foreclosed property sells 20.3 percent below its market value. The median discount level is slightly lower in Orange County at 19.6 percent compared with 21 percent in Los Angeles County.

The real estate folks are saying that it won’t depress the market because it is only 6% of sales right now, but if 1 of every 17 house sales is at a 20% discount, it will have an effect, particularly as that number goes up, both in terms of percentage of sales, and in terms of discount.

I remember this joke from the 1989-1992 real estate crash in Massachusetts:
Q: Which of these things do not belong:

  • AIDS
  • Herpes
  • Gonorrhea
  • A Condo in Massachusetts

A: Gonorrhea. You can get rid of it.

Countrywide CEO May Be Involved in Insider Trading

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What, the CEO of Countrywidemay have dumped his stock when he got advance notice in violation of insider trading law???

Don’t make me quote Claude Rains in Casasblanca.

Here is the CEO in an industry that has largely depended on a pump and dump mantality, and has increasingly relied on the ignorance of its customers for its business, and we are supposed to be Suprised when it turns out that there are indications that perhaps the senior management did not scrupulously follow the rules????

Well, knock me over with a sledge hammer.

A Good Analysis of the Collapse of the “Anglo-Saxon Model of Capitalism”

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Martin Wolf has a fascinating essay on how the “mixture of crony capitalism and gross incompetence” in the Anglo-Saxon Model of capitalism (Basically the sort of high finance practiced in the US and the UK, is headed for a fall.

His points:

  • The whole cronyism, corruption, and incompetence thing.
  • That the current model of securitized lending is may not be valid. The models and instruments are incomprehensible, even to the experts.
  • The failure of the central banks to provide meaningful regulation.
  • The spectacle of Hank Paulson, US Treasury secretary, trying to organise a cartel of holders of toxic securitised assets in the “superSIV”, when 15 years ago, all it handed out to Japan was lectures on letting asset prices find their level.
  • That the US consumer is increasingly no longer considered a investing safe haven.
  • That the US consumer is finally tapped out.

I agree with him that these presage long term changes in the financial markets:

Experience teaches that big financial shocks affect patterns of lending and spending across the world. Originating, as it does, at the core of the world economy, this one will do so, too. The question is how stable and dynamic the world economy that emerges will be.

Go to his article to see the graphs.