Why the Worst is Yet to Come.

[backtoschool]

Sounds like CNBC jargon.

Most of us no longer buy it (not that we really ever did).

I see where you are coming from, but it will take awhile for community banks to pick of the slack of the big banks. Someone has to lend to the industries that require loans to stay afloat. We can either take our hit all at once and deal with 24-30% unemployment, or we can slowly try to build a different model.

I am not sure which is the best road to take. Both will have pain associated with them.

[banca rotta]

A
What makes this recession different from the Great Depression in my opinion is that we have much less deflationary pressure now than we did then.

This is because back then we were on the gold standard so there were limits as to what the govt and the fed reserve bank (which btw is not the govt), were able to do as far as money printing.

If given the grim choice of the 1930's style depression or the US defaulting on it's debt and the dollar crashing I would prefer the 30's style.

At least there is hope of a recovery since prices will be so cheap. Those collecting any govt assistance would be better off too since gas, food, clothing, rent would be cheaper. Those with cash could buy houses on the cheap and even buy businesses for job creation.

Now forget it! Unemployment will be much higher and so will the cost of basic necessities.

[Leopard]

Dead Man:

Perhaps I missed it somewhere within the contents of your post..Its troubled me enough for a few days to tumble it around in my mind.but the macro numbers may have escaped my scrutiny

Of all the mortgages currently "out there" in the US..what percentage of the aggregate number are upside down..to your knowlege and as you say hidden by the banks in the shadow inventory???

Perhaps Im not privy to data youve used as basis for this doom n gloom but I often tend to persoanlly adopt such a perspective. I figure that if I can acdept the worst possible scenario, and prepare for it adequately, then I and my family WILL survive.. Ive always believed that, as long as I had ammo and an auto wpn, and training..each of which I have,,Ill prevail.. I hunt, fish and am generally pretty independent and have always preferred to do things for myself and acquire what we need sans the largess of others or the socail contract...It hasnt endeared me to many of the goody goodies of scoisty, but as long as I can live within my ethical paramters..so be it. Fortunately, despit my current CC woes..which WIll pass as I deal with em one way or the other the sun willrise and set..weve moved to the sticks and away from potentially riotous social upheaval, and neither my wife and I have champagne tastes..

We have a 6 fig income, pretty secure for the next 3 yrs.and we drive 17 and 20 YO vehicles which have been paid for ..BTW a Honda accord will last 500 K miles..trust me and still rock @ 28mpg..

Your post raised my concerns for the big picture..theyve alwyays been there as Ive been a military officer and consider myself a patriot, but have never bought into that executive greed which has driven the "current banking business model", even when I was in Fortune 500 land.. I refused to lie to customers_I was in sales_ and was never even a rudimentary asskisser..so needless to say I bounced around a lot..and never quite fir into the upper golf echelon..


We loom on the cusp of retirement with a mid 6 fig 403b and have recovered our 2008 losses and then some..Im attentive to our acccount on a weekly basis now, and will shift funds rapidly if i perceive another downward spiral. I believe we have at least 3 more years of employment in our current locale-the sticks- and by then it may be time to pack it in..

My issue is anything that can wipe out our retirement as Im about to start drawing my SSN..real soon which will add to the kitty.. My plans during retirement is to only "park" perhaps 60% of our nest egg, and vigorously invest the rest just as weve done for 22 yrs...As Im in mutuals..I suppose your scenario would require me to divest any financial assets in favor of other choices...fine but I realize this was a difression BUT

Whats the tipping point in terms of the number of underwater mortgages as apercentage of the total number nationwide for this downward spiral to initiate? Im nowhere near the data you present, but there are probably a significant number of prefectly OK mortgages,where nobody moved or bought the Mcmansion, or looted the HELOC to junket to Europe...

Id just like to get my arms around the big numbers out there..how many homeowners nationwide are OK n havent reached for the brass ring. WE qualified for a far bigger house when we moved here in 2008, but didnt bite..and ended up in the cheapest house on the money side of town, and among the financially well off in this poverty area.

So what Im asking Dead Man is what pct of homeowners nationally screwed the pooch within the last 6 or 7 yrs..and what percentage of that shadow inventory..that the banks are playing games with is necessary to tip the ox cart??

Your post impressed me..sincerely.. Id just like to know more, and as always..plan accordingly.. I really dont think our modest aspirations and the fact that we ignore hi status possessions is going to drag us into any more quicksand..once weve done away with our CCss once and for all and do more things the Dave Ramsey way

[WhatMoney]

Dead Man:

Perhaps I missed it somewhere within the contents of your post..Its troubled me enough for a few days to tumble it around in my mind.but the macro numbers may have escaped my scrutiny

Of all the mortgages currently "out there" in the US..what percentage of the aggregate number are upside down..to your knowlege and as you say hidden by the banks in the shadow inventory???

I'm sure DMC will answer. But I was curious about your question and came up with these numbers:

Industry group RealtyTrac’s year-end report shows a record 2.8 million U.S. properties with foreclosure filings in 2009.
It shows 3,957,643 foreclosure filings — default notices, scheduled foreclosure auctions and bank repossessions — a 21 percent increase in total properties from 2008 and a 120 percent increase in total properties from 2007.
The report also shows that 2.21 percent of all U.S. housing units (one in 45) received at least one foreclosure filing during the year, up from 1.84 percent in 2008, 1.03 percent in 2007 and 0.58 percent in 2006.

In other words, over 97% of all homeowners are not in default or foreclosure. Is 3% really a problem? I don't know anyone locally who cannot afford their mortgage. Most of my associates just paid cash for their homes. The misery is certainly concentrated on this BK board. But if one believes the numbers, it's not exactly the end of the world with 3% of all homeowners nationwide losing their home.

http://www.shelbystar.com/news/forec...tml#slComments

Note the title of this article is "The Worst Is Yet To Come" - yet the worst appears to be concentrated in a few states.

Here are some numbers showing how the real estate bubble affected only a limited number (about 10) States. Not surprisingly, the most negative posts here on the BK forum are posters from those States. Foreclosure rates are falling in 40 of the 50 states already. Where I live, home prices are now rising. I live in a state where greedy speculation and house flipping was not a way of life.

http://www.lifeinqueencity.com/2010/...+Queen+City%29

[MSbklawyer]

China owns us. They will not allow us to tank their economy. Period.

I know that I don't have anywhere near the level of understanding of these kinds of things that you or even most people do; and I know that I am probably being overly simplistic here to the point of being borderline retarded: But how much money do we owe China? Like 2.8 trillion or something like that? Since it is now ok to print worthless money out of thin air, let's just print up a 3 trillion dollar bill, send it special delivery to Ben Bernanke's counterpart over there along with a note saying "Keep the change, c%$*sucker!" The problem of China exporting underpriced goods made with child labor would be solved forever more. And they'll no longer own us.

[DeadManCrawling]

WhatMoney makes excellent points. Most people are NOT in foreclosure, by far. The percentage that is in foreclosure, though, is possibly enough to tip the scales permanently.

Though it is "only 2-3%", there are another 5-7 million coming, which would cause that figure to jump to nearly 12-14% on the low end of the scale. In the worst states, Florida, CA, NV (I live in FL) we passed those numbers long ago.

The reason even 3% can be catastrophic is the way our lending and economic system is set up. Fractional reserve lending, which we use, is a giant chain of dominoes. When the economy is in good shape, there rarely is a problem, and not many fall. In our current state, though, a few percent can crash the whole sector, and even other sectors. This is what happened Fall 2008. No changes have been made to the system since then and we can expect foreclosures to be a major concern through 2012.

This is the most critical time, I think. As an example, banks and other financial institutions generally have a reserves requirement that says if more than 10-14% of loans go into default, they must apply early amortization to themselves. This is a protective device to ensure investors do not get wiped out. Most banks are well over 10% right now. If this wording is in their charter, what it means in practical terms is, once we cross a certain threshold of bad loans, they MUST sell themselves and all their assets to protect investors money. For a text-book example, look up Advanta Bank. They breached the 12-14% bad loan threshold and are liquidating everything. They are also planning to leave their bank division in the hands of the FDIC for the taxpayers to sort out.

One bank, in itself is not tragedy, but if ALL, or even a small number of large banks, end up insolvent in this fashion, through defaulting loans, we will see far worse than what happened in 2008. We will probably never know all of what transpired then, but I suspect the Fed acted to prevent this exact scenario. They admit to it, in part, but not in the scale or degree.

This is why my concern is so grave. A smaller percentage of loans than most people expect can drag down the entire system.

All it would take is for a few million more people to default simultaneously, or within a short time. for instance:

September, 2009-

Investment bank Deutsche Bank released a report earlier this month saying that 48 percent — nearly half — of all home mortgages in the country will be upside-down by early 2011. According to Deutsche Bank managing director and global head of securitization research Karen Weaver, the historical rate of mortgage defaults has been about 7 percent. “However, that experience is of limited relevance because it’s from a period of much more moderate home price declines and stricter lending standards,” she cautioned in an emailed response to questions. In today’s economy, it’s more realistic to expect up to 20 percent of borrowers to default.

http://washingtonindependent.com/57290/homes-underwater-a-stumbling-block-for-recovery

Being underwater can be a good predictor of who will default, and why. Recent research by the University of Arizona, and others, suggests that people will default in masses if they are underwater by a large amount. Out of common sense, if nothing else. Some people can make cold calculated decisions about homes and when they see that their equity may not return for 2-3 decades, it is an easy choice.

Also, "true" unemployment may be as high as 21% right now. Government figures, as usual, are slanted to whatever outcome they want. Their numbers leave out large numbers of people for various reasons. Of course, these people ARE unemployed, whether they are included or not, and will be a drag on the economy whether reported or not.

http://moneywatch.bnet.com/saving-money/blog/home-equity/recession-over-not-with-21-percent-unemployment/1194/?tag=active-mw#comments

WhatMoney, I am sure you're also correct that the BK forum does not represent a good statistical sample and that the true economy nationwide is far more varied.

It is striking, though, to see these thoughts and concerns posted on nearly every board I visit. I saw similar concerns on boards ranging from Koi fish forums, coupon trading, farming and agriculture, investing, survivalists (as expected, there), and even futurist discussion boards. When it is so firmly in the minds of so many, I think that has some predictive value, too.

Even though the troubles may not be apparent in every city and every neighborhood, I think it would be a terrible mistake to underestimate the possible impact you might feel, personally. Truly, we are all connected more than we know, through money, trade, economic policy, and such. One small ripple can stop everything, and that is where I fear we are headed.

WhatMoney, I appreciate your thoughtful, well-reasoned post, and it is good to see signs of hope and life exist in the states that aren't experiencing the disasters we are in Florida and others. I hope that your experience is what we see going forward, because that is a lot more attractive than what I see here.

With such varied data, filtered through media or government, it can be hard to get a real picture of what is going on. That is unfortunate, it would be nice to know for sure, one way or the other, what to expect in the coming years.

best,

-dmc

[DeadManCrawling]

I also wanted to add, the foreclosure mess is also a matter of how you look at the numbers:

A stalled loan modification plan might not be worrisome if the foreclosure crisis were abating. Yet at the end of September, a record 14.4 percent of borrowers were either in foreclosure or delinquent on their mortgages, the Mortgage Bankers Association reported.

That from the New York Times, reported in December 2009.

http://www.nytimes.com/2009/12/06/business/economy/06gret.html?_r=1&fta=y

So, it could be as low as 2-3%, or it could already be as high as 14%. Seems to me there should be an objective way of looking at such numbers, and the spread between 3% and 14% is large enough, in itself, to be catastrophic. Since it is impossible to REALLY know the truth, it makes sense to plan for the worst. And maybe even hope for the best.

Who knows.

[onwards]

And therein lies their salvation

See, the point is this: write down the value of homes to balances, and you will avoid many if not most foreclosures. Furthermore, most of these loans will begin performing again and will CONTINUE TO PERFORM, so the losses will be SMALLER than they otherwise are going to be, not larger.

Structure it in such a way that the underwritten portion must be repaid when the property sells IF the sale price is higher than loan balance up to the forgiven amount, and the losses will be even smaller. To explain what I mean, say that a house has a $500K loan and is worth $350K. You write down the loan to $350K, and put the $150K as an off balance-sheet asset. Say the house sells in five years for $425K; at that point, the $150K is repaid the "excess" $75K and is otherwise extinguished.

The beauty of this scheme is that these OBS assets can then be priced and sold, and even collateralized (heh). Banks can choose to keep them, sell them, trade them or what have you. It can become a money maker for the brokerage arms.

And I tell you, this will stabilize the entire housing market pretty much overnight. Lending will happen again because stuff is accounted for; sure, standards will be stricter, but not in the sense we have to come to think of them. That's because the credit worthiness of the borrower doesn't matter if the underlying asset is worth more than the balance of the loan. At that point the calculation of how much profit you seek to gain compared to the risk profile of the borrowers goes back to the good ol' days when models actually worked, and each bank can make their own decisions. That's because a foreclosure can then be expected to recoup the loan! (unlike today) So standards will get far stricter around VALUATIONS - and that will be a good thing, hombre. It will keep the lid on housing from doing this again.

The problem? banks won't do it because they are in it too much and can't see the light. And politicians, who are the ones that need to force this to happen, won't do it because the bankers are their friends. The result? strategic defaults becoming an epidemic around ALL classes of consumer debt (credit cards is one thing. Then wait till folks decide they should just keep driving their leases without paying until the car gets repoed and then thumbing their noses at their banks - and believe me, I have seen this happen with increasing frequency in the past few months. It goes on and on).

This is what really gets me. The same idiots who got us here are the ones allowed to try and save us - and they are acting in brutal self-interest without any thought whatsoever to macro effects on the entire economy. Literally, right now, it's "grab as grab can". That's EXACTLY why I advocate strategic defaults on debt in general, and definitely on housing. The law is still in our favor; I don't know it will remain that way when the floodgates open.

[dakota112]

I still feel that the current young generation coming up into this mess is ill prepared to cope with out the good things in life; cheap gas, cheap air travel, work trhat doesn't involve sweat, vacation time, sick time, days off, unions etc. I fear this country will tip into anarchy such as when the hurricane hit Katrina as so many are now used to their government to take care of them in times of distress or difficulty. We live in its an every man for himself world, and when this economy really does tank such that it will take 1000 bucks to buy a loaf of bread, it won't be pretty on the streets. It will happen fast when it does. I think many folks are just holding on by a hair, under great stress to pay their bills and many will just give up in despair and than the dominos will fall. You have to have a plan like Marshall Law to keep order or the innocent suffer greatly such as what is now going on in Haiti. Even heads of countries can't get this non war act together and working as it should.

[momisery]

Your so right about the loaf of bread and its costs. What I am watching is the large number of those who are unemployed. Benefits have been extended but many will run out by April or June this year. They say jobs will not be coming back for a year or so, and those jobs may require skills that many do not have. So, the real toll is 17%, but of those 17% are 10.4% that are living on Unemployment and can not find a job. Jobs are tight, but with age, or a BK those jobs are even tougher to get. I have no doubt that the "masses" in any country will revolt if they are left to starve while the wealthy are rewarded with bailouts and bonuses. Cities and States can not afford their costs because taxes are not being paid, what will happen to our country? The largest town close to use is Springfield, MO. The downtown section already looked like a ghost town. Many smaller towns lost their can plants, or canning plants a few years back, like Clever, Hurley, and Crane those towns are all beatup downtown with the rot and decay showing in the older abandon buildings, and those taht are occupied by a mom & pop flea market or such. They do not have the money to repair these buildings so I see it only getting worse. Yet all they can say in Washington is "those jobs are not coming back"... in our new global economy. People are stressed, and that could break at any point.

[JRScott]

Your so right about the loaf of bread and its costs. What I am watching is the large number of those who are unemployed. Benefits have been extended but many will run out by April or June this year. They say jobs will not be coming back for a year or so, and those jobs may require skills that many do not have. So, the real toll is 17%, but of those 17% are 10.4% that are living on Unemployment and can not find a job. Jobs are tight, but with age, or a BK those jobs are even tougher to get. I have no doubt that the "masses" in any country will revolt if they are left to starve while the wealthy are rewarded with bailouts and bonuses. Cities and States can not afford their costs because taxes are not being paid, what will happen to our country? The largest town close to use is Springfield, MO. The downtown section already looked like a ghost town. Many smaller towns lost their can plants, or canning plants a few years back, like Clever, Hurley, and Crane those towns are all beatup downtown with the rot and decay showing in the older abandon buildings, and those taht are occupied by a mom & pop flea market or such. They do not have the money to repair these buildings so I see it only getting worse. Yet all they can say in Washington is "those jobs are not coming back"... in our new global economy. People are stressed, and that could break at any point.

In a way they are being truthful now if they continue on the present path.

The only way to change that is to rip up our trade treaties and charge tariffs on the same level as they do or higher. If they don't want to pay it that's fine they just don't have access to the largest consumer country and some American company (or possibly other foreign country) will step up.

Lets take the various scares over China and Southeast Asia toys in recent years. They've had excessive lead, and now another scandal breaking out. It is clear these people do not have the same stringent regulations we do and it is clear they have no intention of following it only changing when caught. Thus would it not be in the public interest to ban all imports of children's toys. Of course that means you'll pay about twice what you do now for the same item.

We have plenty of farmland to grow food for our people of all varieties, why do we import it and have the occasional scare. Would it not be better to employ our own people and eat food grown domestically that has been done so (at least in the majority of cases according to our laws) rather than a foreign entity that mostly obeys the regulations only after something has gone wrong?

That's why our government has strangled us so greatly. They passed huge regulations on almost anything you make in the United States, however those in foreign countries don't have to follow them, they know we only inspect about 5% of what comes into our country. So they cut corners that American companies cannot cut.

So why does Congress continue to do so? They have the power of treaty and the power to regulate within our borders. Removing the tariffs we once charged has led to us suffering economically by reduced revenues. It has allowed foreign competitors who are not weighed down by the same regulations to produce stuff at half or less than an American can. So why does Congress still allow it?

Because almost every member of Congress is compromised. How many Senators could run on the money they only obtained from their States? How many Representatives could run on the money they only obtained from their Districts? Why is a Senator in North Carolina allowed to accept money from Georgia businesses or Texan business or California businesses? In essence they have bought and sold themselves and through the acquiring of many American businesses by foreign powers they are now directly influenced by foreign powers.

The vast majority of them are guilty of Treason, it is no less than what Benedict Arnold did. They didn't go onto the battlefield or share the plans of our military defense with the enemy but instead they allowed themselves to be bought and manipulated to destroy our economy. And sadly we the People have allowed them to do this, because to many of us kept our heads in the sand to long. To many of us were willing to take a government payout for this or that rather than living within our means and depending on our families, churches and local communities like we aught to have done. Instead we didn't want to be our brother's keeper, instead we wanted to pass that duty on to someone else so that we wouldn't have to make hard choices. We can still save our nation but we must wake up.

It is not a Republican problem, It is not a Democrat problem, it is a core governmental problem. We have a the DC pool that just move from administration to administration, from Senator to Senator, From Representative to Representative. These are people who do not live in the State represented, Who do not live in the Districts they work for. They are not elected. Would it not be better if a Representative had to actually hire staff from their district? Would it not be better if a Senator had to actually hire from their state? Would that not create a link to the common man? Why is it not done?

We have been to complacent, we have allowed this corruption to wither our nation. It is as though we took a bruised apple and put it on the bottom of our fruit bowl covering it up with healthy fruit and let it sit. What happens after a day or two? Doesn't it all start to turn bad? The longer you leave it there the worse it gets?

We have to reach into the heart of the problem and remove the cause not just the symptoms. That's what we do in most elections we remove the symptom. Not everyone that goes to Washington is a bad fruit to begin with, but the longer they stay in that cesspool the more their beauty diminishes.

President Obama promised a new Washington. That is what won him the election, not the health care, not global warming, etc. People are deeply tired of the same ole same ole, and unfortunately for President Obama he misread his mandate, and has delivered more of the same in partisan politics, obvious corruption, and the politics of half truths and unkept promises. He was loved by many on his election day, but there is a deeply troubling thing that worries me. Love can often turn to hate, they are opposites of the same coin. I pray it does not happen but if you see an assassination attempt I do not think it will come from the right, but it'll come from the left, those who had great hope, who felt he would be their savior, who poured all their love into him, will become just the opposite, consumed with despair, feeling there is no hope, and their fear giving way to anger, and hate, and eventually suffering follows. That's the type of person that can kill. I pray it does not happen.

President Obama could change and become that great President that the people hoped for and desired, both Presidents Reagan and Clinton were unpopular their first 2 years. After they lost mid term elections then they moved towards the center and are today heralded as great presidents. Remember the Constitution in no way mentions any party or a party system, George Washington spoke vehemently against such things. He warned us that if we allowed partisan politics to take hold, it would destroy us. Remember in our nation it was formed by the States giving unto the Federal Government a small measure of power, while retaining most power themselves. When you consider that you have to wonder, Why are their national parties at all? Does a national party HQd in Washington DC really represent your views as a Tarheel? As an New Yorker? As a Floridian? Are they looking out for what's really best for your state? Or is it a gimmick to steal your freedom and usurp power and enslave you to their agenda which may or may not agree with yours?

We must wake up before it is to late.