The Credit Crisis - What you need to know

Here is a cute video from ABC News regarding what the credit crunch is all about. This is especially helpful for those of us who have trouble with economics. In cartoon format -

House Prices Down in July

Just when the news seems like it can not get any worse it does. The bailout, the stock market and now the biggest house drop. This article from Bloomberg news explains that Home Prices in 20 U.S. Cities Declined 16.3% in July. Lets take a look-

House prices in 20 U.S. cities declined in July at the fastest pace on record, signaling the worst housing recession in a generation had yet to trough even before this month's credit crisis.

The S&P/Case-Shiller home-price index dropped 16.3 percent from a year earlier, more than forecast, after a 15.9 percent decline in June. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.

The housing slump is at the center of the meltdown in financial markets as declining demand pushes down property values and causes foreclosures to mount. Banks will probably stiffen lending rules even more in coming months to limit losses, indicating residential real estate will keep contracting and consumer spending will continue to falter.

``The fact that house prices quickened their slide before the worst point in credit markets hit this month does not bode well,'' said Derek Holt, an economist at Scotia Capital Inc. in Toronto.

That first paragraph says it all. Every month we are looking for a glimmer of hope. Every month there is none and things look more dismal than we expected. Everyone wants to have hit bottom and for the markets to turn. Does not look like we are even close. Whatever happens regarding the bailouts the affects will linger for months after. People are shaken and/or confused.

Is this what 1929 felt like?

Hurting in New Jersey

The economy is on its downward spiral. The roller coaster ride of the stock market is making the downward descent even rockier. Yesterday down, today a dead cat bounce. The local economy is suffering., Not as bad as some areas of the country - see this California Devastation for how bad things are on the other side of the country. It is scary - and it looks like it is headed this way. That brings us to this article from WCBS-TV (local Channel 2 for North Jersey) regarding the Heart of Crisis: Local Families Drowning in Strife. Lets take a look -

With Congress yet to pass a bailout plan and the Dow Jones sinking, there are plenty of reasons to be concerned about the economy, but what's worrying you the most about the current financial crisis.

...
Scary is the word both Jeff and Judy Marshall of Clifton, New Jersey use to describe the finances of their family. They worry each morning because nowadays they just can't make ends meet. Judy's a switchboard operator and Jeff's a Manhattan doorman. Together, they bring in $4,000 a month, but that's just not enough to pay the bills:

...
Ana Perez of Massapequa is in the same boat. She lost her job at a bank a year ago and even though her husband is working, it's just not enough to cover the mortgage and the home equity loan used for their children's college fund:

...
"Well, obviously the foreclosures are going to impact apartments and businesses in Manhattan. Some people could end up homeless. The fallout is that things are going to go under," said concerned resident Dmitri Lelchuk.

The mushrooming Wall Street crisis could cost the state of New York $3.5 billion in tax revenues over the next 18 months.

Yesterday was a pretty scary down - the DOW had a record drop. People are really hurting. Locally, regionally, nationally and internationally the crisis in on our doorstop.

Bye Bye Wachovia

So Citibank bank is the lucky new of Wachovia. Wonder how all the Option ARMs will play out. That $122 billion will be a nice chunk owned by us taxpayers. Here is the FDIC Press release regarding Citigroup Inc. to Acquire Banking Operations of Wachovia. Lets take a look -

Citigroup Inc. will acquire the banking operations of Wachovia Corporation; Charlotte, North Carolina, in a transaction facilitated by the Federal Deposit Insurance Corporation and concurred with by the Board of Governors of the Federal Reserve and the Secretary of the Treasury in consultation with the President. All depositors are fully protected and there is expected to be no cost to the Deposit Insurance Fund. Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. on an open bank basis with assistance from the FDIC.

"For Wachovia customers, today's action will ensure seamless continuity of service from their bank and full protection for all of their deposits." said FDIC Chairman Sheila C. Bair. "There will be no interruption in services and bank customers should expect business as usual."

Notice how they state the bank did not fail. Nice Spin.

Wachovia and Option ARMs

As expected Wachovia is no more. Thanks in a big part to the Option ARMs that are to be shortly exploding and spiking up the foreclosure numbers to all time highs. We are working on an Option ARM post for later today, but first lets take a look at the Wachovia issue. Here is a Bloomberg article titled Wachovia Option-ARM Mortgage Losses May Force Merger. Lets take a look -

Wachovia's plight stems from the $24 billion acquisition of Golden West Financial Corp., a California lender that specialized in payment-option adjustable-rate mortgages. Former CEO Ken Thompson told shareholders in May 2007 the loans would help propel earnings to new highs. Instead, Wachovia now expects losses on 12 percent, or $14 billion, of the $122 billion option-ARM portfolio. Analysts at Fitch Ratings predict default rates on such loans packaged as securities may reach 45 percent.

``I don't see why Wells Fargo would take on $122 billion of option ARMs to work out after they've eschewed doing those kinds of loans over the past five years,'' said Nancy Bush, an independent bank analyst in Annandale, New Jersey. ``Citigroup isn't in a better position to bid than Wells. They've got their own problems.''

...
Wachovia is the largest holder of option ARMs, ahead of Washington Mutual Inc., the Seattle-based lender that collapsed last week. The mortgages, which the bank calls ``pick-a-pay,'' represent 73 percent of Wachovia's loan portfolio, according to its Web site.

...
Option ARMs allow borrowers to skip part of their payment and add that sum to their principal. Monthly payments increase after five years or once the loan balance reaches a predetermined limit, usually 110 percent to 125 percent. Introductory interest rates can be as low as 1 percent.

...
For the average option ARM borrower, payments will rise 63 percent, or by an additional $1,053 per month, when their rates reset, according to a Sept. 2 report by New York-based Fitch.

Think about those numbers - Wachovia had $122 billion in Option ARMs. The article does not state if that was at the original loan price or reflects the additional 10 to 25 percent increases that are allowed prior to the recast taking place. Either way that number is over 17% of the total bailout number. And most of these Option ARMs are heading one place - foreclosure.

Losing Money in Dover

Originally when the housing bubble burst it looked like the losses would be either to the buyer or the lender. While it was assumed that the lenders would pass the costs to other customers and onto employees things would be self-contained to only to those who were had any investment in the companies with bad lending practices.

Now it is obvious that the losses are throughout our entire economic system. Everyone is going to pay a share. Some of the players are paying the biggest price but the transfer of losses is now a burden on our entire country. Like it or not is irrelevant, it has happened.

So knowing we are paying for bad decisions, which brings us to today's example where both the lender and the buyer are losing money. Unfortunately the innocent tax-paying bystanders will probably be the one that ends up losing the most. Also these posts are almost now more important than others - we have to document the atrocities of the housing bubble so hopefully the next generations will not make the same mistakes. So lets stroll over to Dover and see today's example.

Here is the property -



Here is the property info -

Property Features
Single Family Property Status: Active County: Morris Year Built: 1976 3 total bedroom(s) 1.5 total bath(s) 1 total full bath(s) 1 total half bath(s) 7 total rooms Type: Bi-Level Master bedroom	Living room Family room Kitchen Bathroom(s) on main floor Bedroom(s) on main floor Master bedroom is 16x12 Living room is 14x13 Dining room is 12x8 Family room is 21x13 Kitchen is 12x9 Pool features: In-Ground Pool	2 car garage Parking features: Built-In Garage Heating features: Baseboard - Hotwater,Oil Interior features: Eat-In Kitchen,Ground Level Rooms: Family Room, First Level Rooms: 3 Bedrooms, Bath Main, Dining Room, Kitchen, Living Room, Second Bedroom is: 14x9, Third Bedroom is: 10x10 Exterior construction: Wood, Wood Shingle,Slab Foundation Roofing: Asphalt Shingle Approximate lot is 114X184 Approximately 0.48 acre(s)

Here are the financials -

• The property was purchased for $412,500 in August 2006.

• The original mortgage at time of purchase was for $371,500 using an ARM with Accredited Home Lenders.

• Foreclosure started by a Lis Pendens filed August 2007.

• The property is currently an REO for sale using a realtor for $279,900.

The homeowners down payment of $41,000 or just below 10% of the purchase price is lost. Big amount of savings/equity to lose. And since the Lis Pendens was filed within a year of the purchase the homeowner was basically in trouble just after the ink was dry.


The lender will be writing off a minimum of $108,394 for this property. This is the $91,600 for the difference between the original mortgage and the current selling price of $279,900. The lender will also lose $16,974 if the property sells for the full asking price and the realtor which has listed the property receives the standard commission.

The combine losses just between the buyer and lender total $149,394 for an investment that lasted less than 2 years. That is some loss.

Will Wachovia make it until Monday?

Another bank that has been hit by the financial crisis seems to be teetering. With the loud thud of WaMu still reverberating there are reports surfacing that Wachovia is actively looking for a buyer. Here is an article form the New York Times titled Wachovia, Looking for Help, Turns to Citigroup. Lets take a look -

As concern spread Friday that more banks might run into trouble even with a $700 billion rescue for the financial system, Wachovia, one of those hardest hit by the housing crisis, became the latest to reach for a lifeline.

Weighed down by a huge portfolio of troubled mortgage loans, the nation’s fourth-largest bank by assets entered into preliminary deal talks with Citigroup, and extended feelers to Wells Fargo and Banco Santander of Spain, people briefed on the matter said. The talks are early, and no deal may emerge from them. But it appeared Wachovia was seeking potential alternatives should the bailout plan being debated in Washington not pass quickly, or fail to provide enough help.

Wachovia has a $120 billion portfolio of mortgages loaded with adjustable interest-rate loans that allow borrowers to skip part of their monthly payments, much of which it inherited from its ill-timed acquisition of Golden West, the big California lender, at the end of the housing boom in 2006.

...
“Wachovia has a real problem,” said Len Blum of the investment bank Westwood Capital. “Option ARMs are probably the worst mortgage products out there and Wachovia has a lot more of them than it has in tangible equity.”

...
“The Treasury Department plan will not prevent more bank failures,” said Chip MacDonald, a lawyer who advises banks at the law firm Jones Day. “The plan proposes to make purchases based on market prices, which are likely to be at a loss to the sellers. Such losses will deplete the sellers’ capital, which only strongly capitalized institutions can absorb without raising additional capital or a merging with a stronger bank.”

Option Arms are bad for everyone. Those that took them and those that lent them. The trouble is caused by the option arms are barreling down the hill looking to take everything in their path - and Wachovia will be one of the first casualties. Practically every homeowner that took one of these loans will also find themselves to be a casualty. Dangerous times ahead - be on the lookout.

The biggest fall yet

No agreements for the big Wall Street bailout and the largest bank failure in US history. Perhaps on the verge of another Great Depression. House markets slumping. And we are still headed downhill for quite some time to come.

So lets take a look at the big bad news of the day - Washington Mutual's collapse. This article from the Wall Street Journal titled WaMu is Seized, Sold Off to J.P. Morgan, In Largest Failure in U.S. Banking History covers a lot. Lets take a look -

The collapse of the Seattle thrift, which was triggered by a wave of deposit withdrawals, marks a new low point in the country's financial crisis. But the deal, as constructed by the Federal Deposit Insurance Corp., could hold some glimmers of hope for the beleaguered banking system because it averts any hit to the bank-insurance fund.

Instead, J.P. Morgan agreed to pay $1.9 billion to the government for WaMu's banking operations and will assume the loan portfolio of the thrift, which has $307 billion in assets. The full cost to J.P. Morgan will be much higher, because it plans to write down about $31 billion of the bad loans and raise $8 billion in new capital. All WaMu depositors will have access to their cash, but holders of more than $30 billion in debt and preferred stock will likely see little if any recovery.

The deal will vault J.P. Morgan into first place in nationwide deposits and greatly expand its franchise.

The seizure was another watershed event in a frenetic period for the U.S. banking system, and came while members of Congress wrangled over the Bush administration's proposed $700 billion bailout package. The tally of U.S. financial giants that have either been seized by the government or sold themselves off to stronger firms in recent weeks includes mortgage titans Fannie Mae and Freddie Mac, insurer American International Group Inc., and Wall Street firms Lehman Brothers Holdings Inc. and Merrill Lynch & Co.

...
The fact that no bank was willing to buy WaMu until it failed shows how badly confidence has eroded in a banking system awash with record profits just a few years ago. Faced with deepening losses on mortgages, credit cards and other loans, big and small banks across the country are struggling with what many bank executives say is a crisis far deeper than the savings-and-loan debacle.

Hard news to take on a Friday morning. Wonder how things on the Dow will shake out today.

Housing Slump Continues

Another monthly report and more gloomy numbers. This article from Bloomberg titled Home Resales in U.S. Fall 2.2% to 4.91 Million Pace depicts how things are still on the downward spiral. Lets take a look -

Sales of existing homes dropped 2.2 percent to an annual rate off 4.91 million units from 5.02 million the prior month, the National Association of Realtors said today in Washington. The median price declined 9.5 percent from August 2007 and the number of properties fell from a record.

...

Today's figures compare with the 4.85 million level reached in June, the lowest in a decade and 33 percent down from the record reached in September 2005.

...

The median price of an existing home dropped to $203,100 from $224,400 a year ago. For single-family houses, the median price dropped 9.7 percent, the biggest decline since records began in 1968.

...

The Northeast suffered a 6.6 percent decline in sales, followed by a 5.3 percent drop in the West. Purchases rose in the Midwest and Southeast.

...

Stricter lending regulations and tumbling home prices make it harder for Americans to tap home equity for extra cash. Consumer spending in the third quarter will probably be the weakest since 1991, according to economists surveyed earlier this month.

A decline in home sales as well as home prices. And we are still in free fall. A significant portion of the sales that were made were from foreclosures - sales yes but at fire sale prices. Bad news all around.

Hope NOW? Hope Never!

Remember how Hope Now was supposed to help all of the home owners in trouble and stop the record number of foreclosures? A little renegotiation between the lenders and the homeowners and everything would be OK. Boy those were the good old days.

Now we are asking if the record $700 billion bailout will help homeowners. There is an article from the San Fransisco Chronicle titled How bailout might help troubled homeowners. Lets take a look -

Under Democratic pressure, Republicans and the Treasury Department on Monday agreed that the bailout plan, which is still in flux, will include some kind of help for distressed homeowners. But just how this will be structured is a matter of fierce contention.

Some economists say that modifying home loans to make them more affordable will slow down the masses of foreclosures, thus putting the brakes on plunging home prices.

"If we solve the foreclosure problem at the consumer level, the root cause of the present problem, we will increase the value of mortgage-related securities and reduce the losses to the system," wrote Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley, in a position statement. "Foreclosures, all else equal, will double the loss on mortgages versus a loan modification program that keeps people in their houses."

...
But Dean Baker, director of the Center for Economic and Policy Research, a progressive think tank in Washington, D.C., said he thinks far fewer homeowners will turn out to be financially qualified for a modification.

"If someone can't afford it, we're not going to buy them a house," he said. "I don't think it will transform the housing market. Maybe it will reduce the number of foreclosures by 10 percent or 15 percent if we're lucky. We still have an awful lot of people with mortgages they can't afford."

Also interesting at the end of the article there is a review of calls made to a housing hot line designed to keep people in their homes. Approximately 20% of the calls need budget counseling prior to even entering a contract, 10% want to leave their homes (sell or walk away), 35% would not ever be qualified due to income, 17.5% may be qualified but there are too many problems and only 17.5% qualified for a loan modification actually make it to completion. And these are the people reaching out for help.

More Jersey Numbers

This is one expensive state. So much money going into housing. It would be interesting if housing costs were differentiated between original mortgages and HELOCs. The HELOCs themselves could be broken down into two categories - those for home improvement (reinvesting) and those that were spent on all else. All else would include medical expenses, credit cards, new cars, education, etc. Although this information signifies that people are barely making it, some of the questions may be why. The renters are self explanatory but not the home owners.

In this article form the Atlantic City Press titled Census supports feeling New Jersey 'Cost of living is out of control' we can see how expensive the cost of housing is in New Jersey. Lets take a look at the graph first -




Here is a look at the article -

U.S. Census figures released today only bolster the perception that the Garden State is the land of high-priced living.

New Jersey homeowners last year paid the second-highest costs in the nation in maintaining a house with a mortgage, or $2,278 per month. Only Californians paid more, at $2,314 per month.

Meanwhile, the median price of a month's rent in New Jersey, including utility and fuel costs, was the third-highest nationwide, at $1,026. Hawaii ($1,194) and California ($1,078) were first and second.

More than 46 percent of New Jersey mortgage holders and nearly half of all renters paid 30 percent or more of their monthly incomes on housing costs, 2007 census data show. Nationwide, only 37.5 percent of homeowners paid 30 percent or more of their income on mortgage and housing costs.

"Everybody has bills, everybody has mortgages ... and it seems like we're at the highest with taxes. We're at a breaking point in New Jersey," said Jerry Cantrell, president of the New Jersey Taxpayers' Association. "It has got to be turned around, or we're going to be headed in a spiraling fiscal mess."

Interesting numbers. These are kind of dated with the huge downturn of the housing market. But it still is shocking to see that New Jersey ranks right after Hawaii and California. Interesting info none the less.

Income and Housing Costs

We know that income has basically remained flat for the average worker for the last decade or so. But housing prices went up, up and away. Here are some numbers from Yahoo News about Millions spend half of income on housing. The scariest part of the article is that this is gross income, not net income - so factor in taxes and there is not much left. Millions of people living on the edge. Lets take a look at the article -

[M]ore than 7.5 million people — almost 15 percent of American homeowners with a mortgage — are spending half of their income or more on housing costs, according to 2007 data released Tuesday by the U.S. Census Bureau. That is up from nearly 7.1 million the year before.

Traditionally, the government and most lenders consider a homeowner spending 30 percent or more of their income on housing costs to be financially burdened. But that definition now covers almost 38 percent of American homeowners with a mortgage — 19 million of them.

...

The data underscore the serious affordability problems in this country and highlight how the slightest financial problem — from a lost job to higher gas prices or insurance premiums — can put a family behind on their mortgages and into the realm of foreclosure.

...
In San Francisco, more than one out of five homeowners with a mortgage spends half or more of their income on housing.

That's also true in 13 more of the largest 100 metro areas analyzed by the Associated Press. Other places include California metro areas of Stockton, Los Angeles, Riverside, Oxnard-Thousand Oaks, San Francisco, and San Diego. Also in the top 10 are the Fort Myers, Sarasota and Orlando metro areas in Florida, and New York-Northern New Jersey-Long Island.

Housing prices are a huge burden. Interesting that regionally people are also paying a large part of their income towards housing costs. As the crisis begins to reverberate locally things will really hit the fan.

Here is an interesting graph from the same article putting things into perspective -

While the housing market has been going down the percentage of people paying more of the income towards housing has increased. The numbers appear to have an inverse relationship. Pretty scary indeed.

Interesting Stats

We know on average Americans have too much debt. This post called Debt industry still working hard at duping us at NJ Voices has some interesting stats on just how much debt we have. Lets take a look -

- About 20 percent of New Jerseyans have 10 or more credit cards. (Source: Experian national score index study, February 2007)

- Americans hold 450 million Visa cards alone. (Visa USA internal statistics, fourth quarter 2006)

- The average household debt in this country -- not including mortgages -- is more than your parents probably paid for their first house.

- The average American with a credit file is $16,635 in debt, not including mortgages. (U.S. News and World Report, "The End of Credit Card Consumerism," August 2008)

...
- The average college graduate has nearly $20,000 in debt. Credit card debt is up 47 percent for people ages 25 to 34 over the last 15 years. (Demos.org, "The Economic State of Young America," May 2008)

These are some pretty scary numbers . Especially since we have a lot more turmoil coming at us.

Depression 2.0 or Depression Lite?

Big question that is getting thrown around. Probably depends partly on where you live and what your occupation is. First lets take a look at a very interesting poll form the American Research Group. Usually one does not see goose eggs in a legitimate poll - but here we are:

National economy	Getting better	Staying the same	Getting worse	Undecided
Sep 2008	-	13%	82%	5%
Aug 2008	18%	19%	60%	3%

That is correct - no one across the entire spectrum feels that things are getting better.

Now onto the question how to make things better. So many people really want to believe that the bailout will change everything. This magical $700 billion can eradicate all of the forthcoming problems and prevent a serious meltdown. Here is an article from a US News blog taking the assumption that the Bailout Prevent Great Depression 2.0. Secretary Paulson's magic $700 billion will prevent a collapse of the market. Even though the Fannie and Freddie promise last month did not seem to do anything. But let's take a look at the post -

OK, let's run the numbers. Paulson is asking for $700 billion. But that massive amount doesn't include previous government actions to cure the credit crisis (like propping up Fannie Mae and Freddie Mac), nor does it take into account money the government may get back from selling the bad assets it will be purchasing. So let's say those situations cancel each other out, and we are really talking about $700 billion. Now that money is being borrowed. So you take $700 billion borrowed for 30 years at prevailing interest rates, and you are talking about $2.5 trillion. But as Paulson said last week, "I am convinced that this bold approach will cost American families far less than the alternative: a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion."

Now let's do the math on the "alternatives." What would doing nothing cost?

1) Scenario 1: Great Depression "Lite." This is supposed to be the worst financial crisis since the 1930s. So let's assume that the total freezing up of American and global credit markets caused something half as bad as the Great Depression. From 1930 through 1933, the U.S. economy shrank by about 25 percent. Now let's say that by doing nothing and letting Mr. Market do his worst, the $12 trillion U.S. economy shrinks by half that amount (12.5 percent), or around $1.5 trillion over four years. (Also, figure a near doubling in unemployment.) But there's also the opportunity cost of not returning to growth, even at a so-so 2.0 percent a year. Doing nothing costs $1.1 trillion more in lost growth. So now we are down $2.6 trillion.

...

2) Scenario 2: Great Depression 2.0. The economy shrinks by 25 percent over four years, or $3.2 trillion, plus $1.1 trillion in lost opportunity growth. Economic cost: $4.3 trillion. The market falls two thirds from its peak, losing $7 trillion in value from its current level, plus $3 trillion from not getting a rebound. Stock market cost: $10 trillion. Housing falls an additional $10 trillion from current levels, plus the lost opportunity of $2.5 trillion from a rebound. Housing cost: $12.5 trillion. Total four-year financial and economic cost of doing nothing: $26.8 trillion.

See that magic $700 billion and Secretary Paulson can prevent a meltdown. At least until the next round of begging and bailouts...

Get Over It

Check out the post here regarding the bail out at Bergen Jersey foreclosure blog here. Tom gave an excellent synopsis. Now after that great review of the proposal lets take a look at this article titled Be ticked off - but get over it from CNN Money. The threats are constant that what ever happens will be worse than what will happen if the huge government bail out falls through. Lets take a look -

So once the blind rage subsides, people will hopefully take a long-hard look at what the government has proposed and come to the realization that doing nothing to rid the nation's banks of all the poisonous mortgage assets on their balance sheets would be far far worse.

"Taxpayers have every right to be angry because we've gotten into this mess by a combination of irresponsible behavior and lax regulation," said Chris Probyn, chief economist with State Street Global Advisors in Boston.

"However, if you look forward, by letting those responsible pay the price, there will be a spillover effect and the economy could go into sharp and protracted recession."

...
"I don't think the government had a choice but to take these bad debts of the banks' books," said Tom Higgins, chief economist with Payden & Rygel, a Los Angeles-based money management firm.

"What makes capitalism work is borrowing and lending. The problem, without this bailout, would have been you would have condemned the economy to a period of halting growth at best," Higgins added.

Nice advice Tom Higgins - capitalism working great so lets have the government and taxes bail out the industries. There is a lot that does not make sense with this proposal. There is so much contradictory information being thrown around. Since the public aspects of the plan are very vague people are reading into things that they would or would not like to see.

That line of "get over it" will probably thrown around over and over again. This upon the constant threat of act now or things will be devastating. Maybe it will be maybe it won't. But this is also another case of consider the source.

Debt Issues

How bad is the individual debt right now? Pretty bad even before the Wall Street bailout has started. Here are some stats on personal debt right now from a Bloomberg article titled Five Financial Truths Defy Wall Street Madness: John F. Wasik. Lets take a look -

The institutional-debt firestorm and credit crisis has raged through world financial markets with a vengeance and no one knows when or how it will end. While the U.S. Treasury and legislators have announced a temporary plan to insure money-market funds and buy mortgage securities, it's unclear whether this will curb Wall Street's fears. Has consumer debt become the latest flash point?

As the economic reckoning continues, some 10 million Americans have filed for bankruptcy since 2000. One in seven families is dealing with a debt collector. In the past two years, more than 3.5 million have received foreclosure notices.

...
The bacchanal was enormous: Some $1.2 trillion in home equity was borrowed against from 2002 to 2007, says the public- policy group Demos in New York. That debt was created to largely cover other obligations such as credit-card bills, which total almost $1 trillion or $17,000 per household for those carrying a balance, according to the Federal Reserve Board.

We have become a nation consumed by debt. It seems like the only we are good at producing and exporting lately. Last week we wrote about the craziness that got us into this mess - the thought that buying and reselling the same properties for ever increasing amounts would help us. It makes as little sense as the ever changing government proposed bailout.

The Wall Street bailout is all about debt. Bad debt. And we are supposed to once again in the magical trickle down theory. The government - well not the actual government, one person the Secretary of the Treasury - wants to be granted unlimited power with unlimited funds having no oversight to bail out Wall Street. No Strings. No Oversight. Just give them the money to those who "need" it and leave them alone. Everything will be alright. Trust the people who got us into this mess to get us out. No time for evaluation. No time for input by economists. Do not even bother to ask Roubini or Krugman who have been correct about everything for advice. There is no time. Just give unlimited taxpayer funds to the gurus of high finance and everything will be OK.

Trust the ones who drove us into the ditch to get us out? Isn't there a chance they will drive us off a cliff instead?

Your New Property in Jefferson

There were two gamblers in today's featured example. Both were actually making the same bet - that housing prices would continue to keep rising at historic levels. The home owner bought the house with 100% financing hoping that the price would go through the roof and within a year there would be equity in the property. The lender basically made the same gamble based on house values only going one way. If property levels continued to increase even a foreclosure would not be a money loser.

Three years after the purchase we are looking at these purchases through a different perspective. This was a bad bet. The home owner lost their home and their credit - but no money down. A week ago the lender would have been out the funds for allowing 100% financing on a property that is now worth significantly less than the 2005 "appraised" value. Now it looks like the public will be a loser taking the burden off the lender. Let's take a look at the house we (hopefully won't) collectively own -

Here is the property -


Here is the property info -

Property Features
Single Family Property Status: Active County: Morris Year Built: 1950 4 total bedroom(s) 3 total bath(s) 3 total full bath(s) 9 total rooms Style: Cape Cod Master bedroom Living room Kitchen	Basement Laundry room Bathroom(s) on main floor Bedroom(s) on main floor Master bedroom is 16x10 Living room is 21x15 Dining room is 13x10 Kitchen is 10x9 Basement is Partially Finished Fireplace(s) Fireplace features: Wood Burning	2 car garage Parking features: Detached Garage Heating features: 1 Unit,Oil Forced air heat Interior features: Ground Level Rooms: 1 Bedroom, Bath(s) Other, Kitchen, Laundry Room, Living Room, Walkout, First Level Rooms: 1 Bedroom, Bath Main, Dining Room, Kitchen, Living Room, Second Level Rooms: 2 Bedrooms, Second Bedroom is: 12x10, Third Bedroom is: 12x9 Exterior construction: Vinyl Siding Roofing: Asphalt Shingle Approximate lot is 87x100 Approximately 0.2 acre(s) Lot size is less than 1/2 acre Utilities present: Septic,Public Water,Electric Service

Here are the financials -

• The property was purchased in April 2005 for $319,000.

• The original mortgage was taken in April 2005 for $255,200 with Weichert Financial Services.

• A second mortgage was opened the same day in April 2005 for $63,800 with Weichert Financial Services.

• The property started the foreclosure process with a lis pendens in October 2007.

• The property is currently an REO for sale with a realtor for $254,000.

The property owner took out a piggy back loan which resulted in no money down No money down on a house - it sounds insane today and as well as prior to the Great Housing Bubble but that's how things were. So no money down to buy a house with financing through an extension of a realtor. That sounds crazy as well - realtors having mortgage brokers in house. But that's the way things were and it seemed normal at the time.

But lets get back to the example - the no money down property was in trouble 2-1/2 years after the purchase. A Lis Pendens was filed last October and the results were foreclosure. The lender will stand to lose at least $80,240 if the property sells for the full asking price and the realtor receives the standard fees.

That would be a big loss for a lender. Are you looking forward to being the potential owner? Didn't think so.

Trouble with Refinancing

Remember during the Great Housing Bubble when any time someone got into any kind of trouble the answer was just refinance. Needed to get some more cash- just refi cash out. ARM rates going up soon - just refinance. Mortgage brokers told there clients the rates were great and they could just come back and refinance in a few years when things went up. Now that many mortgage companies are out of business and refinancing is getting harder than ever with stricter and stricter requirements. It is interesting to read this article titled Is a refinancing boom coming? from the Sarasota Herald Tribune. Lets take a look -

A dramatic drop in mortgage rates has motivated some homeowners to wonder if they should refinance. A better question might be: Are they able to refinance?

Back when house prices were zooming upward, it was easy to refinance a mortgage. Lending standards were loose: You could borrow 100 percent of the home's value, you didn't have to document your income, and no one cared if you had a few late credit card payments in your recent credit history.

Lending requirements are a lot more strict now than they were during the housing boom. In many areas, house values have fallen. The combination of these two factors means a lot of homeowners will have to sit on the sidelines for this would-be refi opportunity. Over and over, mortgage bankers and brokers say that the lower rates are good news "provided you have the ability to qualify."

...
In you live in South Florida, Southern California, Phoenix, Las Vegas or another market where the bubble popped violently, you might not be able to refinance even if you made a 20 percent down payment two or three years ago. Prices have fallen so far in those markets that many homeowners owe more than their houses are worth. Those people can't refinance unless they have enough cash to make up the difference between the loan balance and the home's value.

Even if the house is worth more than the mortgage balance, a refinance might not save any money if the new loan would require mortgage insurance. Generally, mortgage insurance is required on home loans for more than 80 percent of a house's value.

As for a refinance boom coming - the only way we can see that happening is that part of the huge socialization bailout of Wall Street settlement would be to allow those with ARMs and Option ARMs to refinance into 30-year fixed without penalties and at affordable real-time market prices. That would require huge write-downs from the 2005 and 2006 housing price highs. That would wipe out all prepayment penalties.

In too many areas people most likely wanting a refi are already in too much financial trouble to qualify.

It will be interesting see how things sort out for Main Street in the next few weeks.

Giving out some bad advice

People are always pushing advice on how to handle the current credit crisis. The tricky part is figuring out what is really in the consumers best interest. There are always people looking to make money of the backs of others - in good times and in bad. So our advice is to take all economic advice with caution. Do your homework on who is giving the advice and in whose best interest the advice really is.

This is evident in an article titled Stay calm in face of the crises from the Washington Post and posted on Recordnet. Lets take a look -

Given the current turmoil, this is a prime time for scams, bogus business opportunities and questionable advice.

...
I would be cautious about following the final two tips from the CMPS Institute.

The organization advises people to max out their home equity line of credit before lenders cut them off. Nicholas advised that consumers borrow the money and put it in an FDIC-insured account.

A loan isn't a good safety net. Instead of borrowing and paying interest on money you don't need, save more while you have the resources.

Why recommend people take out a mortgage if they don't need it?

The answer becomes clear when you consider that CMPS is also a membership group for mortgage professionals who have a financial interest in getting you to take out a mortgage.

Hear! Hear! And this final paragraph says it better than we could say ourselves -

In this economy, you'll hear a lot of advice about what you should do to preserve or produce money. Just consider the source and motives of the people handing out this wisdom before you make any financial move.

When you find yourself in a hole - don't keep digging! The CMPS advice is just dig faster and faster.

Quarter of US Population See a Depression

According to a poll printed in the USA Today in an article titled Anxiety rises as the era of easy credit comes to an abrupt end. The second poll question shows that people feel things are bad now but should be better in a year. Lets take a look at the article -

Nearly one-quarter of adults — 23% — believe the U.S. economy is in a depression, according to a USA TODAY/Gallup Poll taken Monday and Tuesday. That's nearly double the 12% who said so in February.

People haven't lost hope. Nearly half — 47% — say they expect the U.S. economy to be growing a year from now. That's roughly unchanged from the 44% who expressed the same view in the earlier poll.

...
Consumers are relying on credit cards more than ever, especially as it gets harder to land home equity loans. Revolving debt — much of it on credit cards — hit a record $969.9 billion in July. People are starting to use their cards for necessities such as groceries and gas, credit counselors say.

...
Mortgage rates fell after the bailout of Freddie Mac and Fannie Mae, but now they're inching up. HSH Associates says the average rate on a 30-year, fixed-rate mortgage was 6.14% on Wednesday, up from 6.02% last week.

But banks are making it hard for many borrowers to take advantage of the low rates by tightening lending standards. The bar likely will be raised much higher now that Freddie Mac and Fannie Mae have been taken over by the government.

While it is good people are optimistic things still have a ways to go. We still have to enter the second half of the mortgage meltdown - the Option ARMs. That means more falling home prices, more foreclosures and more financial problems. Our optimistic projections are that maybe by 2010 or 2011 we should be see some recovery and home price stabilization.

Housing Starts Slump

A big slump in the housing starts was released today. On top of all the other bad economic news housing starts are at a 17-1/2 year low. The USA Today article titled August housing starts lowest since 1991; trade gap widens discusses the bad news. Let's take a look -

The Commerce Department said Wednesday that starts on new homes fell 6.2% from July, to a seasonally adjusted annual rate of 895,000, lowest since 1991 and well below the 950,000 rate that economists surveyed by Reuters had anticipated.

The August rate of starts on single-family homes was down 1.9% to 630,000, which also was the softest rate since the start of 1991.

Starts in August were a whopping 33% below the level a year earlier.

With home foreclosures soaring and prices falling, builders are clearly bracing for a protracted downturn. New applications for building permits declined 8.9% in August to an annual rate of 854,000.

It was the weakest rate for permits since February 1991 and was far below forecasts for a 930,000-unit rate. The rate of permit applications last month was 36% weaker than in August 2007.

Housing starts down. Less employment. More foreclosures. Companies that made it through the Great Depression can not make it past the Great Housing Bubble. Wow!

May you live in interesting times. Yes it is interesting and yes it is a curse.

Only the Big Guys

Get a helping hand.

Lose your home to foreclosure and you are irresponsible. Maybe the government can throw you a bone - a loan workout or a 90 day foreclosure reprieve but that's it! Run a large company into the ground and walk away with a $47 million package. Funny how corporate lawyers can find ways to get out of everything it seems - except nullify these over generous severance packages. It is amazing! Almost as amazing as the government getting into the insurance business. But that is what we see today with AIG. Here is snippet from the Star Ledger article titled Government steps in to rescue AIG -

Another day, another bailout. The U.S. government stepped in Tuesday to rescue American International Group, one of the world's largest insurers, with an $85 billion injection of taxpayer money.

...
Under the deal, the Federal Reserve will provide a two-year $85 billion emergency loan to AIG, which teetered on the edge of failure because of stresses caused by the collapse of the subprime mortgage market and the credit crunch that ensued. In return, the government will get a 79.9 percent stake in AIG and the right to remove senior management.

The move was similar to government's seizure on Sept. 7 of mortgage giants Fannie Mae and Freddie Mac, where the Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke.

...
"The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times. Hearing of these plans, you have to stop to catch your breath. But upon reflection, the alternatives are much worse," said Sen. Charles Schumer, D-N.Y.

...
"We expect that the proceeds of these sales will be sufficient to repay the loan in full and enable AIG's businesses to continue as substantial participants in their respective markets," the statement said. "In return for providing this essential support, American taxpayers will receive a substantial majority ownership interest in AIG."

Schumer is probably correct that the alternatives are worse. But the government can only prop up so many businesses. The first ones to falter will be the ones that survive. As the list grows longer there will be less that can be done.

Additionally, maybe since the government is taking over all these business the executives should no longer be showered with eight-digit severance packages. They are basically government entities - the executives should get government level salaries. The President of the US makes $400,000 - that should be the limit for all government supported companies. There are no more risks - why should there be rewards!

When is a good time to buy?

There will always be buyers wondering if now is the time to jump in. The interest rates are still low and house prices have fallen pretty dramatically already. The pool of real buyers is a lot smaller since a down payment and good credit are now requirements. People have to juggle the unknowns of how much more the housing market will still fall against when interest rates will go up. This uncertainty is explored in this Bloomberg article titled Mortgage Seekers Find Rates Are Down, Credit Standards Tighter. Lets take a look -

Existing home prices have fallen 7.7 percent since their July 2006 high and rates dropped below 6 percent last week for the first time in more than three months. The obstacle for people ready to buy is finding a willing lender, said Suzanne Bach, senior vice president of New York-based Guardhill Financial Corp., and an 18-year home lending veteran.

...
About 75 percent of U.S. banks tightened standards on mortgage lending to the most credit-worthy borrowers in the three months ended in July, according to the Federal Reserve's quarterly Senior Loan Officer Survey released Aug. 11.

...
Around the country, homebuyers looking to purchase property for more than $417,000 are facing some of the toughest scrutiny, said Marve Stockert, executive director of the Illinois Association of Mortgage Professionals and a 38-year veteran of the industry.

``The most difficult thing now is the appraisals are being scrutinized so much more than they have ever been,'' Stockert said. ``The higher the sale price, the more scrutiny that is happening. We're talking two or three appraisals on the same property."

The purse strings are being tightened. Lenders have no choice. The big gamble is to jump on a low interest now but risk paying too much for the property versus waiting for the house prices to fall more but risk paying a higher rate. Another risk is finding a lender as time goes on. The pool of lenders, like the pool of buyers, is also continuing to shrink.

But then there is this paragraph that stands out on its own. Its too good and too out there to be part of the rest of the story -

The credit squeeze is contributing to falling home sales. In July, the National Association of Realtors' index of pending home resales fell 3.2 percent, a decline NAR Chief Economist Lawrence Yun blamed on ``overly stringent lending criteria.'' The index is down 6.8 percent since July 2007.

The plunging housing market, record foreclosures on bad loans that are making financial giants tumble like dominoes and the National Association of Realtors are complaining that the criteria is" overly stringent"? Spin is one thing but this is not even reality.

Maybe Lawrence Yun should start up his own mortgage firm and teach us how to do it right this time. The wonder of no doc loans, pick-a-payment, and piggyback mortgages to anyone who had a pulse - and probably sometimes to those that did not. Requiring any down payment is too stringent! Requiring good credit is too stringent! Requiring an honest appraisal is too stringent! 1

A Great Fall

Getting rich selling the same assets over and over again. But the prices would go up forever. After all they are not making anymore land. There were some people looking out the housing sector and speaking out that it did not make sense and was not sustainable but no one wanted to listen to the bears. Perhaps if the investment banks looked at the big picture they would not be collapsing like dominoes.

Robert Shiller was one of the few lone voices speaking out about the nonsense that occurred during the bubble. Here are some excellent points from a Forbes article titled The Humpty Dumpty Economy. The article is a review of Shiller's new book titled The Subprime Solution: How Today's Global Financial Crisis Happened and What to Do About It. Lets take a look at the review -

Why did house prices get so out of whack? The litany of explanations and the associated cast of culprits are long and familiar. Aggressive and sometimes unscrupulous lenders pushed mortgage loans out to complacent, gullible and often uncreditworthy (subprime) borrowers, on terms that seemed enticingly low upfront. When the real estate-backed loans were repackaged and sold to investors as securities, rating agencies routinely and irresponsibly graded them as high quality. Regulators looked away.

This binge of borrowing and re-borrowing was facilitated by cheap money at home and plentiful money abroad. And Americans were in collective denial that wealth cannot be created by selling the same asset--homes--to each other in part because the whole business had the conscience-assuaging egalitarian veneer of promoting homeownership, especially for low-income blacks. Life, liberty and the pursuit of happiness in the new millennium required not just the SUV but also a home, preferably a McMansion.

Shiller's contribution here is to view all these elements as important but not the real deal. The ultimate cause, according to him, was simply bubble psychology, the collective belief that had taken hold that house prices could only head in one direction, a belief reinforced by the observable reality that house prices were indeed steadily accelerating for several years. Why is this diagnosis appealing? Because all the culpable actions--lazy home appraisals, regulatory neglect, dubious ratings and even the Greenspan "put"--were ultimately sustainable only because of the "social contagion," as Shiller aptly puts it, that house prices would not come down.

Shiller's focus on the fundamentals then naturally leads to his creative and original remedies. Caught up in the tangled web of proximate causes and multiple suspects, most mainstream analysts see the remedy largely in terms of better regulation. Leave aside how this is achieved in practice, history shows with depressing regularity that regulation alone is unable to prevent speculative bubbles in assets, whether they are tulips, art, stocks or land.

...
To Shiller, the solution is not a choice between markets and regulation but more of both in order to harness the true potential of finance while minimizing its vulnerability. Trust should finally be reposed not just in regulators or markets but in financially literate and discerning consumers. Some of the more innovative ideas include providing subsidized financial advice to customers, creating default options for mortgages to prevent the average borrower from succumbing to enticing but bad choices involving teaser rates, ARMs, etc., and setting up a financial product safety commission like its consumer safety counterpart.

This summary is not just a great review of a book - it is also an excellent synopsis for the economic mess that is going on around us.

Whats that sound?

Probably the whoosh of regional falling home prices thanks to all the trouble on Wall Street this morning.

First Lehman

Then Merill

Followed by AIG

Who's next?

And how much did Northern New Jersey's home values fall over night?

A Bad Investment in Mount Arlington

Knife catching can be dangerous. Buying property as the prices are falling can do some lasting damage. Except during a few years during the bubble buying and selling a property within a year was a losing proposition. Buying and selling in the same year as the market is still falling can be even worse. Basically one is just throwing away money.

There is a mindset with many people that they have to own a property - even it is not in their best interest. Some think housing would be a great investment. Others see it is part of the American Dream. But when tens of thousands are lost within one year it is both a bad investment and a nightmare. That is the case with today's example. Lets take a look -

Here is the property -

The Front of the Townhouse

The Living Room

The Upgrade Kitchen

Here is the property info -

RELOCATED SELLER. UNIQUE OPEN MODERN DESIGN. GORGEOUS HARDWOOD FLOORS, TOTALLY UPGRADED CENTER ISLAND KITCHEN WITH GRANITE AND STAINLESS STEEL APPLIANCES. STUNNING DOUBLE-SIDED FIREPLACE. CUSTOM BLINDS AND WINDOW TREATMENTS. CENTRAL VACUUM, 9-FOOT CEILINGS. VOLUME CEILINGS IN MASTER BEDROOM AND BATHROOM. TWO LARGE DECKS OVERLOOKING LAKE. TENNIS COURTS, GYM, CLUBHOUSE, POOL. DEEDED DOCK.

Here are the financials -

• The property was purchased for $600,000 in August 2007.

• The first mortgage was for $480,000 with in ARM in August 2007 with JP Morgan Chase.

• A second mortgage was opened the same day in August for $50,000 with JP Morgan Chase. This loan was closed about a month after the purchase.

• The property is currently for sale through a realtor for $549,000.
  

The owner of this property put almost 88 percent down on the property. After paying off the second mortgage a month later the initial investment was 20% of the house price or $120,000. However the owner purchased an expensive property in a falling market and will not get close to their original purchase price.

The current selling price is just under 10 percent lower than the purchase price from a year ago. If they owner receives the full asking price (which is not likely if a relocation is involved and a quick sale is needed) with the realtor fees our featured seller will lose a minimum of $83,940 on a one-year investment.

Lately losses of this quantity are usually only seen on the lenders side. This is a huge loss for an individual to absorb. For most people in this area $84K is well over a years salary - gone, just gone. Some companies do pick up some of the losses on relocation. Hopefully this is one of those cases.

US Foreclosure Rates Up

Following up on our New Jersey foreclosure rate post, foreclosure levels are also up throughout the US. Here is an AP article from Yahoo that discusses Foreclosure filings increase, but at slower rate. Lets take a look -

Foreclosure filings in August increased 27 percent compared to the same month a year ago, a significantly slower pace than in previous months, according to data released Thursday.

Nationwide, 303,800 homes received at least one foreclosure-related notice in August, up 12 percent from July, RealtyTrac Inc. said. That means one in every 416 U.S. households received a foreclosure filing last month.

...
The top three states in foreclosure rates were Nevada, California and Arizona, in that order, RealtyTrac said. Florida, Michigan, Georgia, Ohio, Colorado, Illinois and Indiana rounded out the top 10, though Michigan, Georgia, Ohio and Colorado all reported rate decreases year-over-year.

Weak sales, sinking home values, tighter home loan lending practices and a slowing U.S. economy hamstrung by high fuel prices has left some homeowners with few options to avoid foreclosure. Many can't find buyers or owe more than their home is worth and can't refinance into an affordable loan.

...
An estimated 2.8 million U.S. households will face foreclosure, turn over their homes to their lender or sell the properties for less than their mortgage's value by the end of next year, predicts Moody's Economy.com.

These are pretty rough projections. Housing values and foreclosure rates have not bottomed out yet. Nationally things will still get worse before things get better. Hopefully the damage is not catastrophic.

NJ Foreclosure Up Again

Every month the numbers seem to get higher and higher. The August foreclosure numbers from RealtyTrac were released and the numbers continue to stay grim. Here is an article titled NJ foreclosure filings rose 49 percent in August from the Star Ledger -

Foreclosure filings in New Jersey rose 49 percent in August compared to a year ago, well above the national average, according to fresh data from a firm that tracks the information.

The state had 6,475 filings -- default notices, scheduled sheriff's sales, bank repossessions -- during the month, a rate of one filing for every 536 households, Irvine, Calif.-based RealtyTrac found. In previous months, the counties hardest hit by foreclosures have been Mercer, Sussex and Union, according to the firm.

These numbers are not good news. Higher foreclosure levels push home prices downward as well as neighborhoods and communities. The impacts are greater than just those felt by the homeowners and lenders.

Recession + Bailouts = Depression?

This is the warning coming across the Pacific. If these projections in this CNBC interview with Martin Hennecke, senior manager at Tyche, are anywhere near correct we are in for a world of hurt. Lets take a look at the interview titles Bailouts will push US into Depression -

The end result of the global economic slowdown may be the U.S. announcing national bankruptcy as the government cannot afford the bailouts that it promised and the market will not bail out the government, Martin Hennecke, senior manager of private clients at Tyche, told CNBC on Thursday.

"We expect a depression in the United States. We expect a depression, very possibly, also in Europe," Hennecke said on "Worldwide Exchange."

...
"We already have $3 trillion of debt, as far as the U.S. government is concerned. These debt figures across the U.S. economy are rising very sharply."

When the government can no longer pass the United States' "immense debt" on to taxpayers, it will turn to the holders of U.S. dollars, leading to the eventual downfall of the currency, Hennecke said.

"Definitely, it (the dollar) is not a safe place to be invested in, as real inflation is closer to 10 or 11 percent than the actual inflation numbers given by the U.S. government," Hennecke said on "Worldwide Exchange".

Bailing out every industry and company that is in trouble will have consequences. Everyone is running for a handout. Every industry is too big too fail. But there can only be so much propping up until everything comes crashing down. CEOs and executives can basically bankrupt a company but if they are too big too fail they get a nice severance package as the public is forced to pick up the pieces. People who should be jailed or shunned are instead rewarded handsomely.

We already expect next year through 2010 already looks to be a troubling time, and this analysis sounds like it will be even worse than many expect.

Credit Cards and Unemployment

The government has offered to infuse indefinite amount of funds to prevent a total collapse of the housing and mortgage market. While this is good on a macro scale very little it being done in other areas of the credit crunch or mortgage meltdown. This article from the Chicago Tribune titled Consumer debt defaults looming large addresses the other areas that are becoming problematic but have been largely ignored.

With more people out of work, that likely means many are having a tougher time paying their bills. If that leads to a surge in defaults on debt assets beyond just mortgages, such as credit cards, auto loans and more, we can forget about the credit crisis being over any time soon.

...
But the bailout can't be viewed as a cure-all for U.S. credit problems. The government is trying to prevent further deterioration in the mortgage market, but it hasn't done much to ease other credit troubles.

...
Americans this year have been increasingly using their credit cards to make purchases. Banks have tightened lending standards on such things has home equity loans, which consumers used heavily in recent years to finance spending. New data from the Federal Reserve show that consumer borrowing on credit cards grew at an annual rate of 4.8 percent in July, up from a growth rate of 3.5 percent in June.

But as credit card use has surged, payments on those cards have fallen, even though $106.7 billion flowed into Americans' wallets in recent months from the U.S. economic stimulus package. Card payment rates fell 6.2 percent on a year-over-year basis in July, the ninth consecutive monthly decline. That's the second-biggest pullback in the records kept by the banking analysts at Oppenheimer & Co., behind March's year-over-year decline of 7.4 percent.

With prices going up and real wages going down people are depending more and more on credit cards. Most people do not make drastic changes the minute they hit the unemployment lines. Those changes come slowly as the difficulty in finding new employment increases. But the real shocker from the article is that people who are unemployed are not paying their bills - event their credit cards. Lets take a look -

Research by Merrill's economics team found that there is a tight historical link between the unemployment rate and consumer credit card delinquencies.

"So even with this dramatic support just unveiled for the mortgage market, we anticipate the next phase of the credit crunch will be in the form of lenders being forced to revise up their consumer-credit loss estimates once they start to more fully take into account a deteriorating employment backdrop," Rosenberg said.

The losses might not begin to intensify until 2009, because there is a lag between when someone is out of work and when loan defaults begin.

Wow a find. Could there be a link between people buying house and cars and the unemployment rate? Unemployment and foreclosure?

And 2009? What else do we expect to see imploding in 2009? Oh yeah the Option ARM implosion will just be beginning. Boy does 2009 look to be a difficult year.