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Markets have been dancing pretty well to the tunes of Fed, President Bush and some SWFs. To me, Govt’s intervention to re-define contracts between two parties indicates how serious the trouble is. It’s quite fascinating to see what’s going-on (of course only when someone is not hurt and watching from distance). Here are key highlights of the plan-
- Vulnerable homeowners can either freeze interest payments or refinance mortgages at a lower rate
- New national hotline for mortgage advice
- Borrowers with good credit histories given extra flexibility to refinance
- Congress urged to increase funding for mortgage counselling
- Federal Reserve to announce reforms to mortgage regulations soon
- and other blah blah that you can read plan details here
As interesting as it can get! Who is trying to save whom? and is it really solving the trouble or passing the trouble to the “next government”. I am happy for those who are able to save their homes due to this plan, but what about those who had invested to speculate? There are tons of analysis on how deep is the crisis. Gauging from the topline reports I read, financial institutions collectively own nearly $1trillions of debt. If those are defaulted who is going to buy these? Fine, I give you breathing space to pay me later (as if they have a choice). Cleaveland, Ohio is termed as subprime capital of the US and the current situation is not good as the crime rate is rising. According to Jim Rokakis, the County Treasurer for Cleveland’s Cuyahoga County, “Wall Street strategies that made the cycle of no-money-down, no-questions-asked lending possible have sucked the life out of my city”.
According to some estimates that I came across on “My three cents” -“A combined $250B in losses for 2007/2008. How well are lenders covered? Citi $11B, Merryl $8.4B, HSBC, $3.4B, Morgan Stanley $3.7B , etc in total abut $45billions” . That’s nearly 20%.
Read latest report from “Centre for Responsible Lending” which tells more pain ahead (don’t forget to download the report which is free).
We project that, nationally, foreclosures on subprime home loans originated in 2005 and 2006 will have the following impact on the neighborhoods and communities in which they occur:
- 44.5 million neighboring homes will experience devaluation because of subprime foreclosures that take place nearby.
- The total decline in house values and tax base from nearby foreclosures will be $223 billion.
- Homeowners living near foreclosed properties will see their property values decrease $5,000 on average.
I don’t disagree that you could become millionaire by reading “Nothing Down” but Isn’t the problem more fundamental than creating fictitious wealth. Yeah, this plan may be the right step for short-term, but shouldn’t someone be looking at more fundamental causes (my opinion) of this whole dirty issue? A regulatory authority which keeps a check on what is being devised in the names on financial innovativeness, to make sure the sh**t is not being passed to those doesn’t know financial lingo, to ensure that you don’t lure the ones who doesn’t understand the receptiveness and sub-conscious effects of wonderful advertising. Now you may argue, it’s a free nation and there is freedom for ideas. Yes, true but self-centered Greed has far reaching effects, sooner or later.
Delta Financials (DFC) just filed for Bankruptcy. My third encounter with a bankrupt (Enron and worldcom were the earlier two and still have there shares teaching me lessons everyday). Is countrywide (CFC) too far from Bankruptcy? My bet it’s not but let’s see. Ok forget countrywide, what about Fannie Mae (FNM) which backs mortgages. If a homeowner defaults, FNM is required to buyback these loans at the original price, not the current value. They backed bad loans and must now buy them back. Just look at the current balance sheet: $600 billions in long-term debt out of $760billions debt. Yeah, you may show $782 billions in Assets, but where is the bulk of investment? You guess it right. So how do you find money to buy back those loans? do you get the picture? The picture is not so much different for Freddie Mac (FRE) either. Have fun exploring their balance sheet and fine prints and I am sure you are about to decode interesting insights. Don’t tell me I am being too pessimist and too early, etc. Subprime is the talk of the town these days, but didn’t OP talked about BKUNA, NDE, NEW, Lend in Feb/Mar’07.
Bottom-line – MORE TO COME.
Coming back to markets, super rally, is it? Yeah why not? Both Dow and transports have risen, in fact financials and home builders are doing great too, isn’t gold running nicely as well. Generally when I get bonus my hands can’t keep quiet and look for investment opportunities, so I imagine it to be the same with rest of investing retail public??? In any case, I am not too much worried as I am not trading. But I shall do it tomorrow, benefit from FOMC announcement hoopla. Mark it in your diaries as well Dec 11, 2007, 2:15pm EST. Everyone knows a rate cut is sure, but the question is whether Uncle Ben will be Street Santa to bring gifts for everyone?
Profitable trading, OP