Saturday, December 8, 2007

They Don't Ring A Bell

I was reminded of the adage, "They don't ring a bell at the top of a bull market," as I browsed through old e-mails and found the article below I'd saved from August 2005. It struck me at the time as perverse and contrary to every financial tenet I held. That's the reason I saved it, I wanted it as a kind of time capsule. The article is worth a read, especially now that we have everyone form the Bush Administration to Hillary Clinton offering schemes to "help" poor borrowers.

Home Equity at Risk

"Mortgages used to be something people strove to pay off. Now they've become income tools, but risky ones, some financial analysts say.

As they happily watch their houses swell in value, Americans are changing their attitudes toward mortgage debt. Increasingly, a home is no longer a nest egg whose equity should never be touched, but a seemingly magical ATM enabling the owner to live it up or just live.

We would have been a little early, but this sure was a sign to either take money off the table, maybe to pay off some of that mortgage debt or even look at potential shorts in financial lenders.

Herb Greenberg's Blog has an excellent post from Mortgage veteran Mark Hanson that should scare us to death. A few highlights:

The bailout we are hearing about for sub-prime borrowers will be the first of many. Sub-prime only represents about 25% of the problem loans out there. What about the second mortgages sitting behind the sub-prime first, for instance? Most have seconds. Why aren’t they bailing those out too? Those rates have risen dramatically over the past few years as the Prime jumped from 4% to 8.25% recently. seconds are primarily based upon the prime rate. One can argue that many sub-prime first mortgages on their own were not a problem for the borrowers but the added burden of the second put on the property many times after-the-fact was too much for the borrower. .....

The ’second mortgage implosion’, ‘Pay-Option implosion’ and ‘Hybrid Intermediate-term ARM implosion’ are all happening simultaneously and about to heat up drastically. Second mortgage liens were done by nearly every large bank in the nation and really heated up in 2005, as first mortgage rates started rising and nobody could benefit from refinancing. This was a way to keep the mortgage money flowing. Second mortgages to 100% of the homes value with no income or asset documentation were among the best sellers at CITI, Wells, WAMU, Chase, National City and Countrywide. We now know these are worthless especially since values have indeed dropped and those who maxed out their liens with a 100% purchase or refi of a second now owe much more than their property is worth...

I find it impossible to see a happy ending to all this. It's why I am long gold and why I believe Jim Sinclair keeps on saying,"This is it"!

Another really scary aspect to all this is that "our leaders" didn't see any of this happening and they have no clue as to what's coming. Please, get your financial house in order.

No comments: