Meredith Whitney, a top analyst at Oppenheimer Equity Research, warns in a new report just out today that Citigroup (C), JPMorgan Chase (JPM) and Bank of America (BAC), along with numerous other banks are still understating the severity of the housing crisis, which could impact the values they are assigning their mortgage securities.
Specifically, Whitney says the most important metric used to value mortgage-backed securities are bank assumptions about house price appreciation (HPA).
"The fact that all banks under our coverage have unrealistic HPA assumptions will in our opinion lead to a material and protracted writedown and capital pressure scenario for banks well into 2009," Whitney says in a new report.
While it seems like this report is pouring gasoline into an oil refinery explosion, as banks worldwide have taken $510 bn in writedowns and losses from the housing and credit bubble, Whitney makes some solid arguments.
How Much Further Will House Prices Drop?
The futures market is pricing in peak-to-trough declines in home prices of 33%, an estimated drop that would put homeownership prices back to 2002 and 2003 levels, when homeownership rates stood at 68%.
But that 33% decline would only bring the markets back to levels seen at a time when the mortgage securitization engines were still gunning, pumping out dirt-cheap mortgages on terms borrowers demanded, boosting house prices.
Whitney makes a strong case that the homeownership rate "is headed lower" for a variety of powerful factors, so peak-to-trough house prices plunges "will be far worse than 33%." That means bank assumptions are too rosy, causing more writedowns, Whitney says, without providing specific dollar estimates.
The Banks' Off-base Assumptions
Whitney says Wachovia (WBC) is valuing its mortgage assets using a 20.8% peak-to-trough assumption. Bank of America (BAC) and JPMorgan Chase (JPM), through 2008, are using 25% to 30% and 24% peak-to-trough declines, respectively. Citigroup is using just a 23% peak-to-trough assumption.
A History of Housing Data
Whitney notes that US home prices really started to soar after 1994, as more borrowers could qualify for mortgages and mortgages were easier to come by.
Homeownership rates stood at 64% from 1964 to 1994, then started to soar to a peak of 69.2% in 2008. The rate has now dropped back to 68% (and the question should be asked, was a four percentage point improvement worth it, given the colossal size of the $510 bn in writedowns taken by banks worldwide?)
Meanwhile, mortgage securitization volumes grew annually from $35b in 1993 to over $900b in 2005 and 2006.
Securitizations financed over six times the amount of mortgages as did traditional bank lending since 2000, Whitney says.
Up until 1995, securitizations had accounted for no greater than 90% of the mortgage volume of on balance sheet bank lending.
Mortgage Securitizations Dry Up
Whitney notes that the mortgage securitization market provided massive liquidity to the housing market, as it let people buy homes with cheap financing, "thus driving up home prices to excessive levels."
Banks sold loans to Wall Street, which repackaged those loans as securities sold on the secondary market, thus giving the banks back money to do more lending.
But "the Great Enabler," as Whitney calls Wall Street's mortgage printing press, has clearly stalled. Since the onset of the credit crisis over 14 months ago, less than $100 bn worth of mortgages have been securitized. As liquidity dried up, bank "losses exploded," Whitney says.
As the now moribund mortgage securitization business looks unlikely to be resuscitated, overall liquidity will continue to shrivel, causing fewer mortgages to be available. That means fewer people will qualify for mortgages, and homeownership will head materially lower from the 68% rate now.
Specifically, Whitney estimates that at least 5 mn fewer Americans will be able to put down 20% for a mortgage, qualify for a mortgage, and find a bank to fund a mortgage.
All this creates a recipe for meaningfully lower US house prices, Whitney warns.
And all this means more bank losses are on the way, Whitney warns.
What the Housing Price Data Now Say
The widely followed Standard & Poors/Case-Shiller index is currently pricing a 20% peak-to-trough house price decline, from the peak in June 2006 to June 2008. Currently the futures markets are pricing peak-to-trough home price declines of 33%, Whitney notes.
That tracks a Goldman Sachs study of past housing busts, which looked at 24 house price busts declines of more than 15% since the '70s across 15 countries. The study found that, on average, the fall is around 30%, bottoming out after six years. Freddie Mac (FRE) recently said the overall price decline still has as much as 20 percentage points to go.
Other weaknesses abound.
Housing inventory has hit 10.1 months of supply as of July, the fifth consecutive month of double-digit inventory, a trend that has never happened since the government data was first collected in 1963, Whitney says.
Meanwhile, the percentage of loans in foreclosure stood at 2.75%, the highest level since the Mortgage Bankers Association first started tracking the data in 1979.
Another weak spot: Declining homeowner equity. Federal Reserve data shows average household equity stood at 46.2% in the first quarter of 2008. That compares to more than 80% in the 1950s, and about 60% in the nineties, Whitney notes, attributing the decline to record levels of cash-out refinancings and house price deceleration.
The Banks' Rotten Assets
A further downturn in the housing market could hurt already sour bank assets. At $82.2 bn, Citigroup had the most exposure to subprime and commercial real estate securities, as well as Alt-A and leveraged loans, Whitney says. Goldman Sachs (GS) came in second at $45.6 bn, JPMorgan Chase at $41.4 bn, Merrill Lynch (MER) at $27.6 bn, UBS $27.4 bn, and Bank of America $24.6 bn. Wachovia ad $6.4 bn in exposures here.
The Banks' Geographic Exposures
Where the banks are exposed in the worst hit parts of the country matter.
According to the Case-Shiller index, the areas hardest hit from house price declines, peak-to-June, are Phoenix (down 32.6%), Las Vegas (down 32.5%), Miami (down 32.4%), San Diego (down 29.9%), and Los Angeles (down 28.5%).
Whitney breaks down the top players' portfolios, showing their exposures geographically and where the vulnerabilities lie--with "significant, concentrated exposure to California and Florida through their loan portfolios, particularly in mortgage and home equity," she writes.
The banks' residential mortgage exposure to California and Florida ranges from 33% of their portfolios (Citigroup) to 59% (Wachovia).
Bank of America
Whitney says Bank of AMerica's residential mortgage portfolio was $239b at 2Q08. California represents 35% of its portfolio at 2Q08, Florida 6%, New York 6%, Texas 4%, New Jersey 4%, and Virginia 4%.
While the overall portfolio declined 14% in the first six months of 2008, the California and Florida portfolios only declined 6% and 8 % respectively.
Bank of America's home equity portfolio was $122 bn at 2Q08, up 6% from 2007. California represents 28% of the portfolio at 2Q08, Florida 13%, New York 6%, Texas 2%, New Jersey 7%, and Virginia 3%. Bank of America has grown the portfolio 6% in the first six months of 2008 and that growth has been concentrated in California, up 12% year to date.
Citigroup
Citi's 2007 annual report provided the first geographic disclosure regarding the first mortgage portfolio that Whitney and her team could locate. Within the $150 bn portfolio, as of year-end 2007, California represented 27% of Citi's portfolio, New York 7%, Florida 6%, Illinois 5%, and Texas 4%.
Citi's 2007 annual also provided the first geographic disclosure regarding its home equity loans that Whitney could locate. Within the $63 bn portfolio, at 12/31/07, California represented 27% of Citi's portfolio, New York 13%, Florida 7%, Illinois 4%, and Texas 3%.
JPMorgan Chase
As of the second half, with a mortgage portfolio at $62 bn, JPM's largest concentrations were in California at 25%, New York at 15% and Florida at 11%. JPM has grown its mortgage portfolio aggressively, up 11% from year end 2007 through the first half. Growth has been strong in California, New York, and Texas, with these states growing in the double-digit percentages through the first six months of 2008.
From 2005 to 2Q08, JPM grew its portfolio the most in CA (up $1.7b), Illinois (up $1.0b) and AZ (up $0.4b) for states with exposure disclosed over this time period.
Whitney also delved into JPM's home equity portfolio and breaks it out by state from 2005 through the first six months.
As of the first half, the portfolio stood at $95.1b. JPM's largest concentrations were in California at 16% and New York at 16%. JPMorgan's home equity portfolio is essentially flat on the year, up less than 1% through the first six months of 2008. From 2005 to 2Q08, JPMorgan's home equity portfolio has grown the most in California (up $4.7b), New York (up $4.7b), and Arizona (up $1.3b).
Why the Fed Rescue Plan is doomed to fail
Washington lawmakers are still trying to figure out who exactly will pay for the US$900 billion-plus rescue package proposed by the Treasury Department and the Federal Reserve Bank. But the package itself does not address the most fundamental issue which led to the crisis in the first place: a total breakdown in the integrity of asset valuations.
The pricing logic on which the US government will purchase bad debt from faltering financial institutions has not yet been disclosed. In fact, currently available information suggests that no verifiable pricing mechanism will be publicly available at all. By all accounts, Treasury or Fed officials will determine debt prices on a case-by-case basis. And that is precisely why the entire rescue package is doomed to fail; as bond risk spreads this coming week will show, the chaos and uncertainty surrounding asset valuations will continue, and even intensify.
The underlying fact is that no group or institution in particular is responsible for the crisis. It is the capitalist system which is imploding, in its totality. The rapidly changing structure of the global economy is ensuring that the true worth of American labour will remain depressed well into the next decade. As a consequence, family incomes are not only capped; for a large majority, incomes are declining in real terms, given the sharp hikes in food and oil prices. Since the overall capacity to service housing, credit card and other types of consumer debt is severely restricted, it is virtually impossible to see what key value drivers will improve the quality of mortgage paper in the foreseeable future.
Nobody has recommended taking remedial action to rectify either the impaired status of asset valuation techniques or the flawed system of credit ratings. When told that an asset is worthless unless it can generate sustainable cash flows, an advisor to presidential hopeful Barack Obama indicated that the policy of constructive protectionism will eventually upgrade inflation-adjusted family incomes which, in turn, will underpin home values. A John McCain surrogate claimed that more oil drilling will, almost immediately, change the course of the US economy. In reality, neither protectionism nor drilling will resolve anything.
Not that Wall Street insiders are unaware of the need to revamp asset valuation methodologies; what they lack is the will, and what they fear is the explosive political impact of a programme which will directly challenge the qualifications of real estate brokers, appraisal specialists, bank managers, certified accountants, project engineers, corporate monitors and financial analysts. The lack of quality at all levels of the valuation matrix was far from apparent as long as asset prices were rising, year after year. Today, as the surpluses supporting housing debt servicing have disappeared, for a variety of well-grounded reasons, the serious weaknesses within that matrix stand exposed. The rescue package, in brief, simply reflects the fact that a new era of state capitalism has begun with a vengeance. In its true form, the free market has collapsed.
September 20, 2008 at 2:19 pm
Dave Young
note to Dr Detroit.....watch out, the paranoids are after you....really.
September 18, 2008 at 10:30 am
Dave Young
Prices are flat but stable in some geographic markets, where sellers are not upside down, where historical growth (units and price) have been reasonable and moderate.
This correction is not a universally disrupted national market - it is largely a localized phenomenon.
September 18, 2008 at 10:26 am
Dana Swan
There may be a "tipping point" when a large number of home owners at the same time realize that the house they paid too much money for will never be worth what they paid for it in their life times.
At that point, these home owners may default on their mortgages at the same time.
If this occurs, a "criticall mass" of home owners with high mortgages may default at the same time causing a panic in the housing industry....
September 18, 2008 at 1:18 am
April
The ticker symbol for Wachovia is WB not WBC. Wachovia stock is under $10. BIG DIFFERENCE. Wachovia will be one of the next banks to fail.
September 17, 2008 at 4:50 pm
James
I live in San Diego, in a dual income white collar family with no children. Owning a home costs so much that we rent in a nice neighborhood, that we could never buy in. Yet we can barely afford to own in the crappiest neighborhood. We almost got into one of those crazy loans to buy a tiny condo but backed out.
Now we just sit and wait, hoping that housing will someday get back to normal. With reports like this, I think they will someday. Though when will that day be? When inflation catches up to the housing prices? Due to a reckless govt.??
It seems that the govt. is not going to let these adjust and the banks are keeping the blindfolds over their eyes. They should just let everything adjust, get qualified homeowners back in the homes, making payments and move on. Right now, empty houses are sitting on the hopes of getting their money's worth.. while they slowly rot, lawns become overgrown and people grow agitated waiting for them to open their eyes.
Why not look at the historical numbers and price em out for a quick sale? Go back to 1998 and price everything back to then when the numbers make sense to qualified buyers? To people with good credit scores and downpayments (which they would actually have because the house price would make sense) and get things back to the way they should have been all along.
September 17, 2008 at 2:49 pm
Walt
How about-McCain for President-his wife is rich, so he won't sacrifice his good name or sell the country out for money. He has a golden opportunity to end his life going down as a "great president" if he can get a grip on it all.
How about- Palin as VP -she has guts, determination and did I say GUTS to blow the whistle on the do nothing politicians in both parties who are clogging up Washington.
How about-Mitt Romney- as an "Economic Czar". He has turned around several companies and the Olympics. Possibly the most capably business man in politics to get a grip on the economy.
How about_T. Boone Pickens-as "Energy Czar". He is rich, won't be bought off and has a common sence plan that can be implemented.
Then just time and hard work to save our country from the do nothing politicians. Buy the way what's wrong with a praying President or Vice-President? We need God on our side. He was on our founding fathers side. We abandoned him, not the other way around.
September 17, 2008 at 1:40 pm
Brian
The Florida real estate market suffers from two problems. Not only are mortgages and peoples ability to make payments a problem, but the Florida Legislature and in turn the national legislature have done nothing to stem the costs associated with homeowner insurance in the states. It can now constitute up to 25 to 30% of a mortgage payment in some areas.
Many of the foreclosures are victims of raising insurance rates that made what was once a barely in budget home for some an impossible payment.
This in turn affects the ability to resale the homes as well. Even the banks cannot get rid of the foreclosures with the insurance rates adding so significantly to the mortgage.
September 17, 2008 at 7:35 am
DrDetroit
Hmm, let's do some math here
and some arm chair physics.
If you run your car in a garage - we find there is a relationship between volume or air, exhaust output - etc....
So, let's call the planet one big garage.
Hmm
How do we get out ?
Uh oh, it just came up on me realllll fast like, then all of a sudden I couldn't breath !
ouch1
not with the risk
IF Smoking is bad for a person ?
Petro for a society is no different long term.
I just can't see where that's incorrect.
And yet ?
"It's God's WILL that pipeline be built"
My god, even a bad Steven Segal movie wouldn't have that in it.
Michael Caine would walk off the set going
"I'm Not ginnuh doo-yit, it's an addition to the script I was NOT made aware of, bloody someone at this studio is going to pay for the time you've wasted (that would be the analog to the US consumers time they will waste with these discoveries on 'character' with Palin), I'm done, find yourself another actor"
Segal would probably say - "I'm sorry, but I've GOT to go against God here, I've GOT to stop Aegis I from going on line "
? ? ?
What a STRANGE reality we're in here
I really do feel McCain has already been rigged to win.
I really do, I think Palin was chosen to make it 'look real'.
Religious fundamentalists - we've seen from Monica Goodling in Dept. of Justice - to my god - the director for hiring of the White House Executive wing was the president of Pat Robertson's university -
It's not Islam, it's the other side of the same coin.
And it's just VERY VERY VERY peculiar that oil - is the real communion for both of these patrons purporting to be - practitioners of god's will - (as 'they' see it of course- you know, privatized views for collective ideals ? - that kind of thing ? ).
I even question Lehman going down to exposure on this
We all know BS got called on Margins and fell
you know ?
Oil was very volative recently, we're all aware of that.
Could Lehman be fallout from that ?
Have we let the children loose on the island (Lord of the Flies)
Did we find deregulation from the Bush Cheney energy policy (that apparantly WAS the policy, no policy at all - only enforced) and companies like Enron and Andersen ? as 'ideal' as the 'reals' we were left with ?
I'm not so sure the removal of the uptick in July 2007 has changed the yeast in this bread recipe such that the dough now can rise to 6x it's volume.
My experience is, the more you increase that margin on volume with bread, the tighter you environmental controls need to be.
Here we have margins of 500 - call Eli Lilly ? Is America Bi-Polar ?
I even question if deregulation from Uptick though is behind these manic swoons, dives, and whatever other verb you come up with to place here that you think will work.
September 17, 2008 at 6:15 am
DrDetroit
By the way
All these articles on credit drying up, banks failing (ok, only what ? 129 so far? or cough - 117 ? ) - investment banks ?
And did you know how HOT it IS in Dubai right now ?
and by HOT I mean, if you can't get a loan HERE at 750 pico ?
Get one there at 615
I love the 5 Star Qatar airline commercials. 5 Star airliners ? with 5 star chefs ?
My god - and US Air wants to charge you to even LOOK at the bathroom ?
sheesh.
So, American - even though YOUR bank might not take money from Abu Dhabi - and go bankrupt - you can go STRAIGHT to Dubai and pass go, AND - hey, just saying, money is everywhere there.
Guess who's money it was though ?
yours
and why is it there ?
because - you gave it to them....
and why did you give it to them ?
Any time the US corporations promoted petro profits- perhaps after watching too many episodes of the Beverly Hillbillies ? - they jeopardized -
your health
your economic integrity
your home mortgage ( if it's part of the last 11 billion injection into citi from Abu Dhabi.
Last week I asked myself, wow, if a cigarette can cause cancer, sheesh
what's car exhaust doin' to me ?
September 17, 2008 at 6:05 am
DrDetroit
The irony of all of this is...
Profits from oil resources acquired by religious fundamentalist groups in the middle east completely funded by the West's long term consumption of a dinosaur energy solution to power automobiles - could have provided parachute.
That's right folks.
Instead of out tax dollars to come, or the next generation of children who will be paying for this, as 20 yr olds now are STILL paying for this same toxic loan integrity fleecing from Savings and Loan we had with Silverado / Neil Bush, McCain Keating 5 etc... Guess what ? I am suggesting this.
Instead of the FUTURE US dollars that don't exist yet to pay for this mess burded on the backs of our children, we do this. We accept our OWN money we've given to religious fundamentalists who have acquired oil resources in the middle east, and we give it to the religious fundamentalists in the US under the christian right- so THEY can have greed and wealth thanks to God's love through oil profits.
Wait, I got that wrong, no, I was going to say - why not just accept SWF from Abu Dhabi - EVEN for Freddie and Fannie ! One oddity from all of it ?
50% of the US mortgages would be backed by the desert - where 'normally' you'd find no real estate.
Second, my big epiphany today that I realized watching an Alexis Glick video on youtube of why Palin as VP will be the causal factor for gas prices dropping, oh wait, no, I think it was simply TITLED why gas prices will fall with VP Palin as choice, perhaps it just inferred she'd be the causal factor.
Either way, it hit me today, the people in the middle east who have their oil profits in the name of their god Allah, who clearly loves them and is rewarding them ?
is now identical to the Palin message.
I've watched the Palin videos on youtube of her speaking how the pipeline is God's will etc. Very sketchy and seedy stuff, but the big eye opener for me is - I now realize, the very same patterns I see in the middle east ? with hmmm let' see
oil +
lot's of money +
god ?
same thing.
Second epiphany to follow was realizing then that Fox News and all the 'Boo' factor'N it does (to make a new term there) ? Kind of makes Bin Ladens audio tape scare tactics when he releases a tape ? the same thing. Other words Fox News 24/7 is kind of like one long Bin Laden tape strewn out....
BOTH involve God for oil
Hey - I want credit for that...
credit in the sense, I think that's a fair truth to explore.
not in the sense of 'My authorship' but 'Hey, this has integrity'
Odd, the credit is drying up - and all we're spoon fed is small groups of religious fundamentalists who want access to more oil and more profits.
Bizarre.
Humanity, or Civilization, PLEASE PLEASE ---
Like in Grover's "There's a monster at the end of this book"
- Turn the Page !
Yeah, in the end - most religious fundamentalists - like Grover, never realize, in the end it WAS them all along, even all the 'evil' projected.
Bizarre - frustrating to watch AND be a part of.
September 17, 2008 at 5:20 am
bstabler
Using the real estate futures market as comparison is naive because it is very very thin.
Also what about average disposable per capita income to median existing home prices.
September 16, 2008 at 8:19 pm
JOHN RIORDAN
IT WAS ALL ABOUT GREED
September 16, 2008 at 5:24 pm
tbsteph
So, in order to believe Ms. Whitney, one has to dismiss all of the mentioned financial institutions value assessment of their own mortgage portfolios? Wow! If she is that good, let's create a federal risk assessment/asset valuation officer and put her in charge. Then we will all know the true scoop.
September 16, 2008 at 5:10 pm
mark smith
Bravely written Elizabeth.
Meredith Whitney is something, bravo!
September 16, 2008 at 4:32 pm
Jim La Follette
Living in Florida gave me a front row seat. Cash out refi s, and speculation/over building drove this market. It is very hard to convince folks that maybe restraint is in order when they are making a pile of money. It was or should have been clear that a we were in a bubble. Buyers were camping out all night to get a chance buy a home in a new subdivision. Houses were purchased site unseen. DAH!
We are also limited because developers own the political system and have for years. They contribute to politicians in much greater numbers than
any other groups and politicians want to get re-elected.
I suspect the Florida economy will be depressed long after the rest of the states will be growing. I don't know if Mickey Mouse can save us.
September 16, 2008 at 4:04 pm
John of Dallas
wow, what an assessment. it shows how greed and hubris had become so automatic over the last 10 years. very effective and compelling article
September 16, 2008 at 3:30 pm
Jennifer
I was a realtor in Florida when real estate was doing well. I can tell you that prior to 2004, some homes were being sold for around $80,000 and then after all the hurricanes which hit Florida in 2004 and 2005 the same house was selling for $160,000. Banks were financing these homes because the demand for housing was incredible with so many homes unihabitable. Now many of the homes which had been destroyed by the hurricanes have been rebuilt. But the demand is gone. No one wants to buy a house in Florida. I moved from Florida in February 2008. I miss Florida terribly but my friends that are still realtors have told me that there are still homes for sale on every street and many of these homes have been on the market off and on since 2004 (the year of terrible Florida hurricanes). Whenever another big storm hits the U.S. people along the gulf coast want to move and I am sure that with the damage hurricane Ike just inflicted in Texas, even more homes will be listed for sale. The problem is that the there are few buyers. The buyers can't qualify and if they can, they want the sellers to have a perfect home to compete in the market and pay all the closing costs. Realtor's can't hardly make a living and so I gave up my real estate license. It is going to take years for this situation to resolve into anything that is normal. Banks which are reposessing homes are often getting the house back for more than the house is currently worth and they are trying to sell the home for a price that will cover the expenses the bank has incurred. Rarely are banks asking a reasonable price in which the buyer will go in with equity. I have seen web sites which discuss foreclosure homes for cheap but many of the web sites are bogus. I don't a fix for this and that is why I left the industry and many other realtors are leaving it as well. How can anyone be optimistic about the housing market right now. If you have a listing and you have to go back to your seller over and over and ask them to lower the price, than the seller loses confidence with you. But homes won't sell if they aren't priced competitively. There is always someone else with more equity who is willing to price a home rediculously low in an effort to sell. Therefore, prices will continue to go drop. I think that home prices in Florida will need to see a 50% price reduction before the market will stabelize. Homes have to be affordable. Also, home prices became artifically inflated due to demand from hurrincane damage when it was unjustifiable and the prices stayed that way for a number of years.
September 16, 2008 at 2:35 pm
aboutthis blog
Elizabeth MacDonald is the stocks editor for Fox Business Network. She is recognized as one of the top prize-winning business journalists in the country, and has received 14 awards, including the top prize in business journalism, the Gerald Loeb Award for Distinguished Business Journalism, and the Newswomen's Club of New York Front Page Award for Excellence in Investigative Journalism.
Subscribe to Comments
895 views
Rakesh Saxena
Why the Fed Rescue Plan is doomed to fail Washington lawmakers are still trying to figure out who exactly will pay for the US$900 billion-plus rescue package proposed by the Treasury Department and the Federal Reserve Bank. But the package itself does not address the most fundamental issue which led to the crisis in the first place: a total breakdown in the integrity of asset valuations. The pricing logic on which the US government will purchase bad debt from faltering financial institutions has not yet been disclosed. In fact, currently available information suggests that no verifiable pricing mechanism will be publicly available at all. By all accounts, Treasury or Fed officials will determine debt prices on a case-by-case basis. And that is precisely why the entire rescue package is doomed to fail; as bond risk spreads this coming week will show, the chaos and uncertainty surrounding asset valuations will continue, and even intensify. The underlying fact is that no group or institution in particular is responsible for the crisis. It is the capitalist system which is imploding, in its totality. The rapidly changing structure of the global economy is ensuring that the true worth of American labour will remain depressed well into the next decade. As a consequence, family incomes are not only capped; for a large majority, incomes are declining in real terms, given the sharp hikes in food and oil prices. Since the overall capacity to service housing, credit card and other types of consumer debt is severely restricted, it is virtually impossible to see what key value drivers will improve the quality of mortgage paper in the foreseeable future. Nobody has recommended taking remedial action to rectify either the impaired status of asset valuation techniques or the flawed system of credit ratings. When told that an asset is worthless unless it can generate sustainable cash flows, an advisor to presidential hopeful Barack Obama indicated that the policy of constructive protectionism will eventually upgrade inflation-adjusted family incomes which, in turn, will underpin home values. A John McCain surrogate claimed that more oil drilling will, almost immediately, change the course of the US economy. In reality, neither protectionism nor drilling will resolve anything. Not that Wall Street insiders are unaware of the need to revamp asset valuation methodologies; what they lack is the will, and what they fear is the explosive political impact of a programme which will directly challenge the qualifications of real estate brokers, appraisal specialists, bank managers, certified accountants, project engineers, corporate monitors and financial analysts. The lack of quality at all levels of the valuation matrix was far from apparent as long as asset prices were rising, year after year. Today, as the surpluses supporting housing debt servicing have disappeared, for a variety of well-grounded reasons, the serious weaknesses within that matrix stand exposed. The rescue package, in brief, simply reflects the fact that a new era of state capitalism has begun with a vengeance. In its true form, the free market has collapsed.
Dave Young
note to Dr Detroit.....watch out, the paranoids are after you....really.
Dave Young
Prices are flat but stable in some geographic markets, where sellers are not upside down, where historical growth (units and price) have been reasonable and moderate. This correction is not a universally disrupted national market - it is largely a localized phenomenon.
Dana Swan
There may be a "tipping point" when a large number of home owners at the same time realize that the house they paid too much money for will never be worth what they paid for it in their life times. At that point, these home owners may default on their mortgages at the same time. If this occurs, a "criticall mass" of home owners with high mortgages may default at the same time causing a panic in the housing industry....
April
The ticker symbol for Wachovia is WB not WBC. Wachovia stock is under $10. BIG DIFFERENCE. Wachovia will be one of the next banks to fail.
James
I live in San Diego, in a dual income white collar family with no children. Owning a home costs so much that we rent in a nice neighborhood, that we could never buy in. Yet we can barely afford to own in the crappiest neighborhood. We almost got into one of those crazy loans to buy a tiny condo but backed out. Now we just sit and wait, hoping that housing will someday get back to normal. With reports like this, I think they will someday. Though when will that day be? When inflation catches up to the housing prices? Due to a reckless govt.?? It seems that the govt. is not going to let these adjust and the banks are keeping the blindfolds over their eyes. They should just let everything adjust, get qualified homeowners back in the homes, making payments and move on. Right now, empty houses are sitting on the hopes of getting their money's worth.. while they slowly rot, lawns become overgrown and people grow agitated waiting for them to open their eyes. Why not look at the historical numbers and price em out for a quick sale? Go back to 1998 and price everything back to then when the numbers make sense to qualified buyers? To people with good credit scores and downpayments (which they would actually have because the house price would make sense) and get things back to the way they should have been all along.
Walt
How about-McCain for President-his wife is rich, so he won't sacrifice his good name or sell the country out for money. He has a golden opportunity to end his life going down as a "great president" if he can get a grip on it all. How about- Palin as VP -she has guts, determination and did I say GUTS to blow the whistle on the do nothing politicians in both parties who are clogging up Washington. How about-Mitt Romney- as an "Economic Czar". He has turned around several companies and the Olympics. Possibly the most capably business man in politics to get a grip on the economy. How about_T. Boone Pickens-as "Energy Czar". He is rich, won't be bought off and has a common sence plan that can be implemented. Then just time and hard work to save our country from the do nothing politicians. Buy the way what's wrong with a praying President or Vice-President? We need God on our side. He was on our founding fathers side. We abandoned him, not the other way around.
Brian
The Florida real estate market suffers from two problems. Not only are mortgages and peoples ability to make payments a problem, but the Florida Legislature and in turn the national legislature have done nothing to stem the costs associated with homeowner insurance in the states. It can now constitute up to 25 to 30% of a mortgage payment in some areas. Many of the foreclosures are victims of raising insurance rates that made what was once a barely in budget home for some an impossible payment. This in turn affects the ability to resale the homes as well. Even the banks cannot get rid of the foreclosures with the insurance rates adding so significantly to the mortgage.
DrDetroit
Hmm, let's do some math here and some arm chair physics. If you run your car in a garage - we find there is a relationship between volume or air, exhaust output - etc.... So, let's call the planet one big garage. Hmm How do we get out ? Uh oh, it just came up on me realllll fast like, then all of a sudden I couldn't breath ! ouch1 not with the risk IF Smoking is bad for a person ? Petro for a society is no different long term. I just can't see where that's incorrect. And yet ? "It's God's WILL that pipeline be built" My god, even a bad Steven Segal movie wouldn't have that in it. Michael Caine would walk off the set going "I'm Not ginnuh doo-yit, it's an addition to the script I was NOT made aware of, bloody someone at this studio is going to pay for the time you've wasted (that would be the analog to the US consumers time they will waste with these discoveries on 'character' with Palin), I'm done, find yourself another actor" Segal would probably say - "I'm sorry, but I've GOT to go against God here, I've GOT to stop Aegis I from going on line " ? ? ? What a STRANGE reality we're in here I really do feel McCain has already been rigged to win. I really do, I think Palin was chosen to make it 'look real'. Religious fundamentalists - we've seen from Monica Goodling in Dept. of Justice - to my god - the director for hiring of the White House Executive wing was the president of Pat Robertson's university - It's not Islam, it's the other side of the same coin. And it's just VERY VERY VERY peculiar that oil - is the real communion for both of these patrons purporting to be - practitioners of god's will - (as 'they' see it of course- you know, privatized views for collective ideals ? - that kind of thing ? ). I even question Lehman going down to exposure on this We all know BS got called on Margins and fell you know ? Oil was very volative recently, we're all aware of that. Could Lehman be fallout from that ? Have we let the children loose on the island (Lord of the Flies) Did we find deregulation from the Bush Cheney energy policy (that apparantly WAS the policy, no policy at all - only enforced) and companies like Enron and Andersen ? as 'ideal' as the 'reals' we were left with ? I'm not so sure the removal of the uptick in July 2007 has changed the yeast in this bread recipe such that the dough now can rise to 6x it's volume. My experience is, the more you increase that margin on volume with bread, the tighter you environmental controls need to be. Here we have margins of 500 - call Eli Lilly ? Is America Bi-Polar ? I even question if deregulation from Uptick though is behind these manic swoons, dives, and whatever other verb you come up with to place here that you think will work.
DrDetroit
By the way All these articles on credit drying up, banks failing (ok, only what ? 129 so far? or cough - 117 ? ) - investment banks ? And did you know how HOT it IS in Dubai right now ? and by HOT I mean, if you can't get a loan HERE at 750 pico ? Get one there at 615 I love the 5 Star Qatar airline commercials. 5 Star airliners ? with 5 star chefs ? My god - and US Air wants to charge you to even LOOK at the bathroom ? sheesh. So, American - even though YOUR bank might not take money from Abu Dhabi - and go bankrupt - you can go STRAIGHT to Dubai and pass go, AND - hey, just saying, money is everywhere there. Guess who's money it was though ? yours and why is it there ? because - you gave it to them.... and why did you give it to them ? Any time the US corporations promoted petro profits- perhaps after watching too many episodes of the Beverly Hillbillies ? - they jeopardized - your health your economic integrity your home mortgage ( if it's part of the last 11 billion injection into citi from Abu Dhabi. Last week I asked myself, wow, if a cigarette can cause cancer, sheesh what's car exhaust doin' to me ?
DrDetroit
The irony of all of this is... Profits from oil resources acquired by religious fundamentalist groups in the middle east completely funded by the West's long term consumption of a dinosaur energy solution to power automobiles - could have provided parachute. That's right folks. Instead of out tax dollars to come, or the next generation of children who will be paying for this, as 20 yr olds now are STILL paying for this same toxic loan integrity fleecing from Savings and Loan we had with Silverado / Neil Bush, McCain Keating 5 etc... Guess what ? I am suggesting this. Instead of the FUTURE US dollars that don't exist yet to pay for this mess burded on the backs of our children, we do this. We accept our OWN money we've given to religious fundamentalists who have acquired oil resources in the middle east, and we give it to the religious fundamentalists in the US under the christian right- so THEY can have greed and wealth thanks to God's love through oil profits. Wait, I got that wrong, no, I was going to say - why not just accept SWF from Abu Dhabi - EVEN for Freddie and Fannie ! One oddity from all of it ? 50% of the US mortgages would be backed by the desert - where 'normally' you'd find no real estate. Second, my big epiphany today that I realized watching an Alexis Glick video on youtube of why Palin as VP will be the causal factor for gas prices dropping, oh wait, no, I think it was simply TITLED why gas prices will fall with VP Palin as choice, perhaps it just inferred she'd be the causal factor. Either way, it hit me today, the people in the middle east who have their oil profits in the name of their god Allah, who clearly loves them and is rewarding them ? is now identical to the Palin message. I've watched the Palin videos on youtube of her speaking how the pipeline is God's will etc. Very sketchy and seedy stuff, but the big eye opener for me is - I now realize, the very same patterns I see in the middle east ? with hmmm let' see oil + lot's of money + god ? same thing. Second epiphany to follow was realizing then that Fox News and all the 'Boo' factor'N it does (to make a new term there) ? Kind of makes Bin Ladens audio tape scare tactics when he releases a tape ? the same thing. Other words Fox News 24/7 is kind of like one long Bin Laden tape strewn out.... BOTH involve God for oil Hey - I want credit for that... credit in the sense, I think that's a fair truth to explore. not in the sense of 'My authorship' but 'Hey, this has integrity' Odd, the credit is drying up - and all we're spoon fed is small groups of religious fundamentalists who want access to more oil and more profits. Bizarre. Humanity, or Civilization, PLEASE PLEASE --- Like in Grover's "There's a monster at the end of this book" - Turn the Page ! Yeah, in the end - most religious fundamentalists - like Grover, never realize, in the end it WAS them all along, even all the 'evil' projected. Bizarre - frustrating to watch AND be a part of.
bstabler
Using the real estate futures market as comparison is naive because it is very very thin. Also what about average disposable per capita income to median existing home prices.
JOHN RIORDAN
IT WAS ALL ABOUT GREED
tbsteph
So, in order to believe Ms. Whitney, one has to dismiss all of the mentioned financial institutions value assessment of their own mortgage portfolios? Wow! If she is that good, let's create a federal risk assessment/asset valuation officer and put her in charge. Then we will all know the true scoop.
mark smith
Bravely written Elizabeth. Meredith Whitney is something, bravo!
Jim La Follette
Living in Florida gave me a front row seat. Cash out refi s, and speculation/over building drove this market. It is very hard to convince folks that maybe restraint is in order when they are making a pile of money. It was or should have been clear that a we were in a bubble. Buyers were camping out all night to get a chance buy a home in a new subdivision. Houses were purchased site unseen. DAH! We are also limited because developers own the political system and have for years. They contribute to politicians in much greater numbers than any other groups and politicians want to get re-elected. I suspect the Florida economy will be depressed long after the rest of the states will be growing. I don't know if Mickey Mouse can save us.
John of Dallas
wow, what an assessment. it shows how greed and hubris had become so automatic over the last 10 years. very effective and compelling article
Jennifer
I was a realtor in Florida when real estate was doing well. I can tell you that prior to 2004, some homes were being sold for around $80,000 and then after all the hurricanes which hit Florida in 2004 and 2005 the same house was selling for $160,000. Banks were financing these homes because the demand for housing was incredible with so many homes unihabitable. Now many of the homes which had been destroyed by the hurricanes have been rebuilt. But the demand is gone. No one wants to buy a house in Florida. I moved from Florida in February 2008. I miss Florida terribly but my friends that are still realtors have told me that there are still homes for sale on every street and many of these homes have been on the market off and on since 2004 (the year of terrible Florida hurricanes). Whenever another big storm hits the U.S. people along the gulf coast want to move and I am sure that with the damage hurricane Ike just inflicted in Texas, even more homes will be listed for sale. The problem is that the there are few buyers. The buyers can't qualify and if they can, they want the sellers to have a perfect home to compete in the market and pay all the closing costs. Realtor's can't hardly make a living and so I gave up my real estate license. It is going to take years for this situation to resolve into anything that is normal. Banks which are reposessing homes are often getting the house back for more than the house is currently worth and they are trying to sell the home for a price that will cover the expenses the bank has incurred. Rarely are banks asking a reasonable price in which the buyer will go in with equity. I have seen web sites which discuss foreclosure homes for cheap but many of the web sites are bogus. I don't a fix for this and that is why I left the industry and many other realtors are leaving it as well. How can anyone be optimistic about the housing market right now. If you have a listing and you have to go back to your seller over and over and ask them to lower the price, than the seller loses confidence with you. But homes won't sell if they aren't priced competitively. There is always someone else with more equity who is willing to price a home rediculously low in an effort to sell. Therefore, prices will continue to go drop. I think that home prices in Florida will need to see a 50% price reduction before the market will stabelize. Homes have to be affordable. Also, home prices became artifically inflated due to demand from hurrincane damage when it was unjustifiable and the prices stayed that way for a number of years.