Monday, December 03, 2007

Homeowner be Damned

So Henry Paulson is going to freeze the interest rates on home loans and Ben Bernanke is going to lower the Fed discount rate a whole point. It’s kind of like fishing with a shotgun in a glass bottom boat. You get a swimming lesson after you pull the trigger.

What happens when you freeze the interest rates? Go out and try to buy any house with financing, its just isn’t going to be there. What businessman will loan money under fixed assumptions only to be paid under a changing set of rules. Georgia a while back passed a law to protect homeowners and effectively shut down the loan industry in the state. This is the old “Pull the rug out from under the lender routine.”

Then we have Bernanke lowering the Fed funds rate. It doesn't take much thinking to figure out that the exchange rate on the dollar will fall. In this case, smart money will refuse to renew their Treasury Bills. Since it’s competitive bidding, less bidders, means higher prices. There is a couple of trillion dollars that could vote with feet. Foreigners will sell the dollar now and wait. Then buy when it hits bottom. If things don’t go right, this could be like catching a bag of cement dropped from a second floor window (messy to say the least). Treasury bill rates could surge up as soon as tomorrow.

The neat thing about lowering the Fed funds rate, is that any money it does create (ie loans to market makers), won’t be heading for real estate or SIVs, it will be going into the stock market. Google could hit $1000 by Christmas (just a joke, I don’t give investment advice).

So what do we have? A shut down of future real estate financing or the prospect of absurd interest rate financing for home ownership. Flight of foreign capital will raise Treasury rates.

What is really happening at the Bernanke and Paulson level? The banking system could collapse. Unless they can keep the homeowner making payments the game is over. In order to keep the banks from dropping dead, the really bad stuff cannot be allowed to be marked to market.

Step back and think about what has happened in the last two years with Real Estate Bubble Bloggs. Many of them have stopped posting. What they were warning about has happened. It was very obvious even back then. Now, all of a sudden, the Government is concerned about the homeowner? I think not. The banks have a pretty good idea of what’s going to happen three months from now. Citygroup has no equity if you subtract its mistakes from its book value. What’s that mean? The government could be called on to take over an organization that is just about half as big as itself.

Ben and Henry are in that Christmas giving mood, so don’t bend over if you need to refi, just walk away, give yourself and your family some real peace of mind.


Debbie said...

"Ben and Henry are in that Christmas giving mood, they've got Viagra and Atro-glide, so don’t bend over"...

Ohhhh, bad image stuck in my head. Yurgh.

Jim in San Marcos said...

Hi Debbie

I think you are right

I cleaned it up a bit--maybe it was just a bit too visual.

ukhousingbubble said...

You might enjoy this article on the Eastern European bubble:

This housing crap is soooooo repetitive.


Jim in San Marcos said...

Hi UK Housing Bubble

Welcome aboard. Thanks for the link on your site.

Things are getting a little repetitive, but believe it or not most people aren't even listening. The sports section of a newspaper generates more advertising that the business section every day of the week.

Cranky said...

Yeah, you gotta love the “changing the rules in the middle of the game.”
If the investors challenge this and lose, that mountain of inventory is gonna stay right where it is (except the prices will stay in a nose dive) for a long time.

The Fed is just dragging this thing out, giving people false hope… or should I say “False Hope Now Alliance”. If people are having trouble now, adjusting to the reset, where are they going to be in two or three years? This economy sure as heck isn’t going to get better within that time. The ripples in the pond of unemployment are just now beginning to radiate out. Whatever job they have now might not be there later. Are they going to be able to make the payments then? I don’t think so.

I have a visual for you Jim… there’s a farmer (government) standing next to a hen house with a pitchfork in one hand, and a hatchet in the other. Next to the farmer is a pack of coyotes (Citigroup, JPMorgan Chase, Wells Fargo, Washington Mutual and Countrywide) licking their chops… listening to the farmer tell the hens “since the egg production reset, most of you chickens are not making the new quota, so we’re working on a plan to keep you in your homes.”

Jim in San Marcos said...

Hi Cranky

Neat Visual.

Could be a rather crunchy meal for the banks.

brad said...

talking about visuals, here's a video clipping depicting the whole crisis and what the financial services industry is trying to get paulson and bernanke to do.

ukhousingbubble said...

Check this story out:

Revealed: how UK banks exploit charity tax laws .

UK Banks have been using "charitable status" to offload mortgage debt from their balance sheets. Moreover, the amounts are huge.

Where is the outrage?

UK Housing Bubble .

Peter T said...

> most people aren't even listening. The sports section of a newspaper generates more advertising that the business section every day of the week.

Could it be that the reader of the business section are less likely to being persuaded to buy stuff they don't need and/or can't afford? (BTW, I don't read the sport section.)

Jim in San Marcos said...

Hi Peter

What I was refering to is that most Americans have no idea what is going on. Only one out of 5 people in my area even get the newspaper.

We can read about the obvious effects of what is going on in the bloggs, but it is almost invisible to the average citizen.

The confusion is over our assumption that everyone understands these issues. John Q Public is in a fog.

We see a picture far different than the average guy in the street. By the time these innocent people figure out what is happening, they will be road kill.