Downgrade of mortgage backed securities and Walkaways re-visited!

President Sarkozy expressed surprise at Moody's downgrade of Ireland yesterday. He should perhaps of seen this coming, or at least suspected some such bad news was heading his way when JP Morgan suggested a €350 billion gift to the PIG, as I blogged here yesterday.

The Housing Crisis which undermines all the economies of the West could by now have been solved had my suggestion, made way back in September 2008, linked here, been accepted. That posting, one of several around that time, concluded as follows:

Nobody yet knows how far UK property prices will plunge but it is essential to be aware that a fall of 20 per cent from peak levels requires a rising property market of 2 per cent above inflation for a period of twelve years before the original peak value is once again achieved. That is far too long to expect an ordinary mortgage holder to maintain mortgage payments for zero return. Once 'walkaways' begin they will spread like a plague with all kinds of consequences such as cross-squatting which will make counter-measures practically impossible - effectively anarchy could be an end result.

Mortgages have always assumed the equity provided by the mortgagee is the first at risk. In this crisis that has to be changed. I suggest that for houses purchased since Gordon Brown, in the words of incoming BoE Governor King, to paraphrase 'moved the Goal Posts and excluded house prices from the CPI' any loss of value on the resale of such houses be directly proportioned between the first mortgage holder and the mortgagee. This is potentially expensive, but less so if it halts further slides in house prices. As the country is effectively bankrupt such a move will need financing and as a further step to somewhat also put the cost of the greed at the door where it lies I would further suggest the exemption of the first home from capital gains tax be withdrawn.

House Prices Emergency

Reuters reports that in the UK the house price index had its biggest monthly fall in August since May 2009, read it here. The reality of the crisis now re-appearing will be aggravated by the past government's efforts to keep underwater borrowers, as those with negative equity are sometimes known in the USA, in their home even if unable to meet their mortgage repayments.

This category of borrowers will now grow in the UK as the masses of public sector parasites are necessarily shed by a bankrupt state employer. Things are developing faster in the USA where a short term refinancing programme is now being pushed by Fannie Mae, becoming known as an Obama Refi, see this explanatory link which includes the following interesting but alarming fact (with my added emphasis):

One of the biggest dangers facing the housing market is the glut of underwater homeowners who could default if their financial situations or home prices worsen. About 11 million borrowers, or 23% of households with a mortgage, were underwater as of June 30, 2010, according to CoreLogic Inc. That number is expected to double next year.

The constant stream of encouraging forecasts of stronger economic growth, activity and recovery in the near future presently flowing from the European Commission, the ECB and various former national European Governments, all in direct contradiction of the factual information of deteriorating conditions in the real world can, at the end of the day only make matters worse.

If 23% of homeowners are in negative equity today and that number doubles in the coming year to almost half of all homeowners, how many will then become Walkaways sending back their keys? What effect will that have on the still floundering, and in the UK nationalised, banking (so-called) business?

Fannie Mae and Freddie Mac Fellatio!

Yesterday was not just the anniversary of the beginning of The Blitz of Britain by the Germans 70 years ago, no doubt being gleefully drooled over on the next morning by German leaders as the aerial reconnaissence photographs revealed the gruesome details of the death and destruction wrought by Germany's might, just as this morning, no doubt, a new generation in Berlin and Frankfurt relish the economic humbling of the City of London brought about by the humiliation of Britain's Chancellor of the Exchequer, George Osborne, in Brussels yesterday in an event that appears to have deliberately taken place on this hugely significant and bloody anniversary, no indeed, for it also marked the second anniversary of Fannie Mae and Freddie Mac being taken into the custody of the US Government.

Does yesterday then perhaps also mark the end of the era of US moral leadership, might and world domination? Fannie and Freddie brought the pride of home ownership to many lower income Americans over many decades. They helped in pulling the country out of the Great Depression of the nineteen-thirties. Has the US Government, Congress, the Federal Reserve or any other body used the past two years to address the underlying problems of these two grossly over indebted mortgage suppliers? It appears not.

In fact the very opposite has been the case. Over the past two years these now government controlled institutions have been the major supplier or underwriters of most of the new mortgages recently issued, therefore merely compounding their underlying problems, read a Bloomberg report from here, tellingly titled "Subprime 2.0 Is Coming Soon to Suburb Near You: by Edward Pinto".

The housing crisis, such as that in the US and in Britain is the main underlying economic crisis on both sides of the Atlantic and it appears for the entire english speaking world, yet neither the US nor the UK Governments will face up to that fact. Solutions have been regulary suggested from this blog. Most recently David Cameron and Nick Clegg have been urged to return their property portfolios to the state from which they have indirectly been drawn. Other Cabinet Ministers would be wise to follow suit so that they can address the economic disaster in which the country now lies with clear eyes and from a sensible starting point.

A man is worth more than the value of his home or the marque of his car. Economic might when misused can be overcome by ordinary people pulling together, that was the lesson of The Blitz.
We can overcome this economic mess by grasping the fact that homes have values because they are secure, situated near schools and jobs priced at a wage which makes them affordable. Bricks and mortar torn down and resold with flat screen TVs or used modern kitchen gadgetry in an environment where no building is taking place have little value at all. Look round your possessions at home today, what are they really worth and if mortgaged to a typical bank, building society, or even Fannie or Freddie ------ what could these failing institutions obtain for their supposed secured assets when society has no hope?

The "End Game" Approaches

"This has been one of the most interesting days in finance ever," said Andrew Roberts, head of credit at RBS. "We are right at the tipping point. Yields are about to collapse even further, equities are about to turn over. The end game approaches, probably in next few weeks."

In the US, the 27pc collapse in existing homes sales in July leaves no doubt that America's property market cannot stand on its own feet without the prop of homebuyer tax credits. "Home sales are in free-fall. These are truly dismal numbers," said Teunis Brosens from ING.

The article from which this quote came may be read in full from here. Readers of this blog will be unsurprised that the western world has reached this point, just as we warned at the start of this summer when JC Trichet pompously departed on his holiday in St Malo claiming that all was incredibly well, indeed with all our warnings down the years, that corrupt self-serving politicians would inevitably land the world in the mess in which we now find ourselves, bankrupt and with no economic weapons left to mitigate the consequences.

Sound money or means of trusted international exchange will be required before recovery can begin. Restoring value to the property market, will be a priority alongside finding as yet unidentified honest and decent leaders. In September 2008 I put forward one idea to achieve the former objective, do Clegg and/or Cameron now have the courage to take on such an approach, and perhaps simultaneously convert to decency? A quote from that old posting:

Mortgages have always assumed the equity provided by the mortgagee is the first at risk. In this crisis that has to be changed. I suggest that for houses purchased since Gordon Brown, in the words of incoming BoE Governor King, to paraphrase 'moved the Goal Posts and excluded house prices from the CPI' any loss of value on the resale of such houses be directly proportioned between the first mortgage holder and the mortgagee. This is potentially expensive, but less so if it halts further slides in house prices. As the country is effectively bankrupt such a move will need financing and as a further step to somewhat also put the cost of the greed at the door where it lies I would further suggest the exemption of the first home from capital gains tax be withdrawn.Decency for Clegg and Cameron could be guaged as a distant possibility by an immediate large cut to UK contributions to the EU pending a halt to their ongoing and grandoise plans for ever more vainglorious enterprises and aggrandisement.

Fannie Mae, Walkaways and Sovereign Debt Stormclouds mount

Fox News reports on Fannie Mae one of the main factors behind the present crisis as this blog has always maintained, read it here.

Negative homeowner equity will shortly become the major problem facing the coalition government yet no plans are in place to avoid the disaster sure to result. This blog made a suggestion to the disaster that was the Brown Government. I repeat that post below, will anybody now listen:

Monday, September 22, 2008

Curing Britain's Property Price Crash.

The Chancellor of the Exchequer, Alistair Darling, in an interview on the Radio 4 Today programme this morning gave no sign that he was ready to confront the UK housing crisis as I feel sure will still be the case in his conference speech later this morning and that of his Puppet Master tomorrow.

The steps being undertaken in the USA over the weekend as reported from an EU perspective are fairly well ( although sometimes inaccurately) summarised in this link.

Britain, it is generally acknowledged, has the second gravest property price crunch in the world, yet unlike in the USA with the magic Mr Paulson, the UK government, oh so typically, seems to be doing nothing to address it, content with ignorant BBC interviewers throwing out suggestions of bonus caps in the city and windfall taxes for the energy sector while chucking ever more billions of pounds yet further down the drain for added liquidity for the institutions at fault.

In my post of yesterday, immediately beneath this posting, I addressed the problem of the householder in negative equity - particularly in my example number 2, of a family with a mortgage in excess of the value of his home but not yet in default - a potential 'walkaway mortgagee' as separate from one in default and given notice of re-possession.

In my view it is the potential 'walkaway' who must first be helped. A decision to quit one's home is grave indeed and places that family in a position of effectively turning their back on the system. It is therefore an action that the government must endeavour to discourage even at great cost. (Re-possessions follow from a considered action of the mortgage holder and form a separate problem).

Nobody yet knows how far UK property prices will plunge but it is essential to be aware that a fall of 20 per cent from peak levels requires a rising property market of 2 per cent above inflation for a period of twelve years before the original peak value is once again achieved. That is far too long to expect an ordinary mortgage holder to maintain mortgage payments for zero return. Once 'walkaways' begin they will spread like a plague with all kinds of consequences such as cross-squatting which will make counter-measures practically impossible - effectively anarchy could be an end result.

Mortgages have always assumed the equity provided by the mortgagee is the first at risk. In this crisis that has to be changed. I suggest that for houses purchased since Gordon Brown, in the words of incoming BoE Governor King, to paraphrase 'moved the Goal Posts and excluded house prices from the CPI' any loss of value on the resale of such houses be directly proportioned between the first mortgage holder and the mortgagee. This is potentially expensive, but less so if it halts further slides in house prices. As the country is effectively bankrupt such a move will need financing and as a further step to somewhat also put the cost of the greed at the door where it lies I would further suggest the exemption of the first home from capital gains tax be withdrawn.

Walkaway Mortgagees or Drowning Householders?

Yesterday in the USA the Federal Government unveiled a new fifty billion dollar plan to aid its underwater homeowners. One blog gives its views here. Moral hazard is the phrase much used elsewhere in the USA.

In the UK we would describe those unfortunates with mortgages greater than their home values as having negative equity. Drowning seems much more apt.

It is many, many months since this blog first warned of the dangers of negative equity being likely to result in Walkaway Mortgagees and likely anarchy to follow. Finally a respected member of the mainstream media has finally awoken to the dangers, read here.

Earlier postings on this topic, together with my suggested solution, may be found by using the keywords "Walkaways" or "UK House Price Crash" in the search bar for this blog.