Bush claims the economy "is robust."
Uh huh.
Not with the credit markets rapidly imploding.
The subprime mortgage meltdown is rapidly spreading into many other areas of financing that are dependent on credit availability at reasonable terms to allow a thriving market.
Unfortunately, based on this explosive report, thus far most of the ramifications affect the costlier Blue states where property values consistently trend higher.
As we have just seen in today's stock market results, turmoil in the bond markets and ongoing detonations in the hedge fund sector, the news is becoming increasingly grim this week and the subprime market disaster threatens sector after sector of the financial markets and potentially the larger economy.
Happy talk about the housing market having bottomed out? If a realtor says that to you, run the other way, plugging your ears and shouting "I'm not listening, I'm not listening..."
This week, a raft of grim developments, with one big lender (American Home Mortgage) going bankrupt and five others ceasing to fund loans, has made the money supply much tighter, so that even borrowers with good credit and adequate resources are getting doors slammed in their faces or having to pay premiums.
A particular hardship for Bay Area home buyers: Lenders are charging top dollar to write nonconforming or jumbo loans -- mortgages above $417,000.
A problem like this does not remain isolated to California. I stated in this diary that the real estate market is nowhere near a comeback anywhere in this country.
The concept of a credit spread, at its base, is the difference between the rate on Treasury bonds and the rate you pay on your current or prospective mortgage and other financial securities. The credit spread first exploded in the subprime securities markets, only to infect the corporate bond markets on which private capital firms depend for easy capital to finance corporate takeovers and leveraged buyouts. Now, the credit problem is spreading further.
Right now, the credit spread is exploding almost everywhere. In housing, jumbo loans are becoming increasingly difficult to finance, even for people with excellent credit.
Many lenders now only want to make loans that can be purchased by Fannie Mae or Freddie Mac, the two quasi-governmental entities that help provide liquidity in the mortgage market. Those two entities cannot buy jumbo mortgages.
"If your (mortgage) is above the Fannie Mae/Freddie Mac limit, even if you're a prime borrower, you will see a significant increase in the rates being charged," said Doug Duncan, chief economist with the Mortgage Bankers Association in Washington, D.C. "If you're not a prime borrower, you will have a hard time getting credit today."
Duncan said jumbo loans are carrying interest rates of 7.5 percent to 8 percent, 1 to 1.5 points higher than a month ago. "This is a big run-up, and we expect it to significantly delay the housing recovery, if it stays there for a while," he said.
Another category feeling the pain: Home buyers who can't make a 20 percent down payment.
The "loser loan," "no-doc loan," and 2nd mortgage financing are dead. If you can't come up with a solid 20% downstroke, and expect to finance more than $417K, you are flat out of luck.
Given that the immediate bay area and similar high-value regions typically rely on jumbo loan packages to get even well-heeled borrowers into homes, this likely indicates that the higher-end housing market in California is going to be stagnant to down for some time.
There's another more baleful consequence. Anyone who has not been prudent enough to refinance their adjustable-rate mortgage into a 30-year fixed is going to pay a huge penalty in higher rates. This is assuming they can even get refinancing. As I've just laid out, this is going to be extraordinarily difficult for anyone sitting on an expensive home with a 3/1 or 5/1 or 7/1 ARM. We do not yet know exactly how the credit spread is going to affect these people once their loans reset to the higher rates. However, I doubt the effects are going to be beneficial.
Without being a loan officer myself, I can pretty much guarantee that the effects of the expanding credit spread are going to hit thousands upon thousands of ARM-based homeowners even harder over the next time span. I cannot believe the credit spread syndrome is going to pass this market segment by. Many of these ARMs provide below-market rates for the up-front years of their loan terms. The mortgage companies dealing with these elements in their loan portfolios are certainly going to impose a higher risk penalty for holders of these loans once they reset.
A friend of ours and his spouse purchased a home in San Mateo in 1999 and went on an ARM refinancing spree, taking full advantage of the innovative loan products available during the extended California real estate boom. As their house continued to increase in value, they performed successive refis at progressively lower interest rates. At the beginning of this year, they saw the writing on the wall, and closed a 30-year jumbo loan at precisely 6%, jumping off the funky loan bandwagon just in the nick of time.
Now, the mortgage market is resetting to extremely conservative norms. Thousands upon thousands of people are now in trouble who just months ago considered themselves immune from the spreading credit disaster. The home ownership boom is not only officially over; a real estate recession is in the cards.
Can anyone expect any help from the Feds?
In a word, NO.
President Bush said Thursday that he's against letting Fannie Mae and Freddie Mac buy more home loans in an effort to prop up the sagging mortgage market, commenting that he prefers to reform the two entities first.
It's "first things first" when it comes to Fannie and Freddie, Bush told reporters at a news conference. The two companies have been riven by accounting scandals.
Bush knows perfectly well what he's doing. States like California and New York bankroll the opposition. For my part, I think the loan market has been out of control for so long, with the "innovative" financial products I referred to earlier, that there is a grain of truth in what Bush is saying here. However, I'm sure he and his advisers know that this will not significantly affect the states that provide Bush with most of his political backing - at least for now. His only interest is in bashing Congress and threatening vetos of the upcoming budget bills. (I'm not bothering to link because his statements are all over the news.)
This tells you all you need to know about his interest in the matter, and how well he knows who is chiefly affected by it. It has the potential to be a financial Hurricane Katrina for high-price states like California.
This is not the end of it, however. Note the disastrous Blackstone IPO. Compare the relatively unregulated realestate market of the last seven years with the COMPLETELY unregulated Hedge Fund sector, peopled primarily by Bush Republicans.
I wonder how soon we'll see those people crawling to Washington with their hands out?