Wednesday, July 9, 2008

Watch Out, This is Going To Hurt!

While those who have been following the mortgage crisis evolve knew that things were not contained to the "subprime" and a "credit crunch." Looking at the big picture of the housing bubble it was obvious that there were still many bad financial decisions that still have not been resolved. The huge equity losses still have not taken their full toll. The issues involving financially underwater houses still has not been addressed. None of these underwater homes can be sold or refinanced without taking a huge, huge hit to the owners and/or lenders. Then there is also the fallout involved with the Option ARMs that have yet to start. People paying teasers rates on houses they will never be able to realistically afford.

The still yet to come gloom and doom on our economic future is featured today in the New York Times. In an article titled Mortgage Fears Cast Shadow Over 2 Agencies, a realistic yet grim economic future is portrayed. The article is packed with important info, so we will just focus on the housing impacts. Lets take a look -

“Across the board, there are probably more write-downs to come,” said Florian Esterer, a fund manager at Swisscanto Asset Management in Zurich. Investors need to look beyond the subprime problems, he said, and consider the decline in the quality of home-equity loans, credit card debt and commercial real estate — problems associated with the end of a “traditional credit cycle.”

“Everything points to a lot more bad news to come,”
said Paul Miller of the Friedman, Billings, Ramsey Group in Arlington, Va. “If Fannie and Freddie are vulnerable, it means no one is absolutely safe.”...

If banks’ results are as gloomy as anticipated, the news could depress other sectors of the stock market and further sap consumer confidence, which is already battered by rising oil costs, mounting credit-card defaults and prices that are rising due to spiraling energy fees and a weakening dollar.

Worldwide, banks and brokerage have written down the value of the assets they hold, notably those linked to mortgages, by more than $400 billion since the beginning of last year. In April, the International Monetary Fund said total losses for banks, insurance companies and investment funds may reach $945 billion, and some forecasters say they bill could be even higher.

“The economic story has gotten worse and worse and worse, and every financial institution seems like its in free fall,” said Steve Persky, chief executive at Dalton Investments in Los Angeles. “It’s not clear at all when this ends.”

“These companies, and the economy in general, are fighting a lot of demons right now,” said Sean Egan, managing director of Egan-Jones Ratings, an independent credit ratings firm. “If things don’t get turned around, you’re going to see more downward pressure on home-building, on financial institutions, on spending. There’s not a lot of places that will be protected.”

This is a pretty heavy look at our financial future. And the end does not seem near. Some people did not realize record foreclosures and write downs would have consequences. All this money seems to have disappeared overnight. People wonder where all the money went. But was it real in the first place?

Now it seems if so much of the home equity was just a financial illusion. This illusion was then picked up and traded by Wall Street. While there were some people sounding the alarms, most people liked the illusion of wealth, of prosperity, of financial ingenuity. Why focus on reality when we could have been chasing our financial rainbows. Well we made it to the end of the rainbow, but the pot of gold turned into a pot of crap.

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