REALESTATE/MORTGAGE/HOUSEHOLD & INDIVIDUAL DEBT/WORLDWIDE CREDIT CRISIS

• The recent increase in foreclosures could be the beginning of a new wave of foreclosure activity with estimated total foreclosure filings in 2007 exceeding 2 million, as a large number of sub prime adjustable rate loans begin resetting their interest rates upward. (Sept. 18, 2007 CNN Money.com)
• The decrease in home values now means that many face mortgages that are larger than their homes are worth. Therefore, fewer borrowers have access to the financial resources to cover their debts and escape foreclosure. (Sept. 18, 2007 CNN Money.com)
• As of October 25, 2007, economists say the troubles in the mortgage market could, all told, cost financial firms and investors up to $400 billion--but experts caution that it could go even higher]. The loss in total real estate wealth is expected to range from $2 trillion to $4 trillion, depending on how far home prices fall. (Reports Suggest Broader Losses from Mortgages, New York Times, October 25, 2007)
• The Joint Economic Committee of Congress predicts there will be two million foreclosures by the end of the year and the loss of real estate wealth just from foreclosures on sub prime loans will be about $71 billion and an additional $32 billion will be lost because foreclosed homes tend to drive down the prices of other houses in the neighborhood. And all of these losses will cause a decline of $917 million in lost property tax revenue to state and local governments. (Reports Suggest Broader Losses from Mortgages, New York Times, October 25, 2007)
• Global Insight predicts that the national average for housing prices will drop 5 percent over the next year and 10 percent before mid-2009 for a total of about $2 trillion. But some experts estimate that prices could drop by as much as 15% causing an overall decline of $3 trillion. (Reports Suggest Broader Losses from Mortgages, New York Times, October 25, 2007)
• But a month later, on November 27, 2007, it was announced that The escalating mortgage crisis will push another 1.4 million U.S. homes into foreclosure and drive nationwide property values lower by 7% next years, according to a report released on November 27, 2007 by a group representing city mayors. (U.S. Mayors Warn Worst of Mortgage Crisis Ahead, Reuters, November 27, 2007)
• The slowdown in new home construction, which has already shed 383,000 jobs could lead to more layoffs ahead since there are still a million jobs that aren’t really needed anymore due to the downturn in housing. (Reports Suggest Broader Losses from Mortgages, New York Times, October 25, 2007)
• The mortgage crisis was caused in large part by homeowners being convinced that as their homes increased in value, they could use their homes like an ATM machine. From 2004 through 2006, Americans pulled about $840 billion a year out of residential real estate, via sales, home equity lines of credit and refinanced mortgages. These so-called home equity withdrawals financed as much as $310 billion a year in personal consumption from 2004 to 2006. All of this activity fell off by 1/3 in 2007, but that didn’t slow the spending until now. (Homeowners Feel the Pinch of Lost Equity, Hew York Times, November 8, 2007)
• Consumer spending accounts for about 70% of all economic activity in the US or about $9.8 trillion so even a slight dip in home borrowing takes huge amounts of money out of the flow. (Homeowners Feel the Pinch of Lost Equity, Hew York Times, November 8, 2007)
• In a recent report, Goldman Sachs suggested that housing-related losses could force banks and other players to cut lending by as much as $2 trillion—enough to trigger a nasty recession. (Banks Gone Wild, New York Times, November 23, 2007)
• Freddie Mac, the big mortgage finance company, posted a $2 billion loss for the third quarter and warned it might not have enough capital on hand to cover the mandatory reserves for its mortgage commitments. This is of great concern because Freddie Mac is considered something of a backstop for the lending industry. (Loan Crisis Entangles Freddie Mac, New York Times, November 21, 2007)
• Banks are denying loans to many businesses, unwilling to bet scarce capital in a time of risk and uncertainty. (Wall Street Sees Silver Lining in Economy, New York Times, December 1, 2007)
• The price of oil, which only last week threatened to break through $100 a barrel, closed on November 30, 2007 at $88.71, but the drop in part was caused by the view that investors now expect a substantial American economic slowdown, which would ease the pressure on the rising demand of energy. (Wall Street Sees Silver Lining in Economy, New York Times, December 1, 2007)
• Personal income great at a seasonally adjusted rate of 0.2 percent in October compared with September, as reported by the Commerce Department. Consumption grew a paltry 0.2%, dropping from the 0.3% increase in September. (Wall Street Sees Silver Lining in Economy, New York Times, December 1, 2007)
• In 2006, the economy was creating about 200,000 positions a month, but in the first ten months of 2007, the number slipped to 125,000 a month and the number could fall to 75,000 in November. (Wall Street Sees Silver Lining in Economy, New York Times, December 1, 2007)
• Rising foreclosures will lead to billions of dollars in lost economic activity in 2008 in the nation’s major metropolitan areas. The biggest losses in economic activity are projected for areas like New York (expected to lose $10.4 billion in economic activity in 208), Los Angeles ($8.3 billion), Dalas and Washington ($4 billion each) and Chicago ($3.9 billion). (Report: Foreclosures to Hit Metro Areas, The Associated Press, November 27, 2007)
• The loss of property, sales and real estate transfer taxes will hurt local and state governments. (Report: Foreclosures to Hit Metro Areas, The Associated Press, November 27, 2007)
• The mortgage crisis is leading to a larger credit crisis: liquidity has been drying up (except as noted elsewhere from the oil-producing nations) as some credit markets have closed, interest rates in other markets, like the London market have risen even as interest rates on U.S. government debt has plunged. (Innovating Our Way to Financial Crisis, Paul Krugman column, New York Times, December 3, 2007)
• Foreign central banks are being forced to inject billions of dollars into their banking systems to offset dangerous credit pressures and even prevent bank failures in their own countries.
• Many of the companies that sold risky mortgage-related securities to investors, concerned about a looming meltdown in the housing market, protected themselves from losses. Goldman Sachs, for example, began reducing its inventory of mortgages and mortgage securities lat last year. Even so, Goldman went on to package and sell more than $6 billion of new securities backed by subprime mortgages during the first nine months of the year. Based on incomplete data, nearly 15% are already delinquent by more than 60 days, are in foreclosure or have resulted in the repossession of a home according to data compiled by Bloomberg. (Wary of Risk, Bankers Sold Shaky Mortgage Debt, New York Times, December 6, 2007)
• The average default rate for subprime loans packaged in 2007 is 11%. About 1/5th of the loans backing securities underwritten by Merrill Lynch are in trouble and 1/4th of the securities backed by Deutsche Bank, Barclays and Morgan Stanley are already in default. (Wary of Risk, Bankers Sold Shaky Mortgage Debt, New York Times, December 6, 2007)
• With the collapse of the credit bubble, Wall Street’s risk management, as well as the multiple and often conflicting roles it plays, have been exposed. (Wary of Risk, Bankers Sold Shaky Mortgage Debt, New York Times, December 6, 2007)
• As early as January 2006 the head of trading for asset-backed securities and collateralized debt obligations for Deutsche Bank and his team began advising hedge funds and other institutional investors to protect themselves from a coming decline in the housing market. Yet Deutsche Bank underwrote $28.6 billion of subprime mortgage securities last year and $12 billion in the first nine months of this year. (Wary of Risk, Bankers Sold Shaky Mortgage Debt, New York Times, December 6, 2007)
• So, based on the perceived risks, what companies like Goldman Sachs began to do was reduce their stockpile of mortgages and mortgage-related securities and buy expensive insurance as protection against further losses. Still, they did not stop selling subprime mortgage securities and retained a piece of the securities they sold. (Wary of Risk, Bankers Sold Shaky Mortgage Debt, New York Times, December 6, 2007)
• What the examples of what all of the other banks and lenders did during this time period demonstrate is that home loans were highly lucrative to Wall Street and its bankers, and this overcame their concern for the risks. (Wary of Risk, Bankers Sold Shaky Mortgage Debt, New York Times, December 6, 2007)
• Top Florida office on December 4, 2007 moved to stabilize an investment pool for local governments after a multibillion dollar run prompted the state to temporarily suspend withdrawals by cities and school districts. Local governments, which have b een unable to remove any money from the fund since November 29, will be allowed to start making limited withdrawals, but the problem has left some towns and school districts unable to meet payrolls or pay bills and has raised concern about similar funds across the country. Florida’s governments in recent weeks have withdrawn billions from the fund because of concern over investments liked to subprime mortgages. It is unclear what losses the fund may sustain, but the sudden flight from the fund points to a broader uncertainty among officials in other states over how far the credit and mortgage crisis will spread. Many state governments pool money from towns, schools and other state agencies into funds in an attempt to earn higher returns. Several of these pools have invested in highly rated vehicles that have been downgraded by ratings agencies. (Fund Crisis in Florida Worrisome to States, New York Times, December 5, 2007)
• “The odds now favor a U.S. recession,” write former Treasury Secretary Larry Summers. “I’d put the number at about a 75% chance,” says investing guru jack Bogle. “We are becoming more certain that the recession is either here or no more than two quarters away,” warns Merrill Lynch economist David Rosenberg. While talk is cheap and these folks have a poor record predicting recessions, there are good reasons to be concerned that the economy is weakening. They include struggling banks, the collapsing housing market, the volatile stock market, oil prices, the weak dollars and lots of nervous investors around the world. (The End of Spend, Time Magazine, December 10, 2007)
• Since the early 1980s U.S. consumer spending has risen, growing from accounting for 62% of the GDP in 1981 to 70% today. Spending by U.S. consumers accounts for 19% of the global economic activity. (The End of Spend, Time Magazine, December 10, 2007)
• Of increasingly greater importance, this activity is being more fueled by debt these days. In 1983 household debt equaled 55% of income in the U.S.; now it’s above 114% (and above 136% of after-tax disposable income). (The End of Spend, Time Magazine, December 10, 2007)
• The middle class—households earning roughly between $20,000 and $100,000 annually—had a debt-to-income ratio of 141% in 2004, according to NYU economist Edward Wolff, and that figures to be higher today. In the third quarter of 2005, the national savings rate (personal income minus spending) went negative for the first time since the Great Depression, and it has bounced back only slightly since. While it is not necessarily bad to borrow money and it is hard to say what the right debt ratio or savings rate might be, at some point we have to pay back the debts or default. (The End of Spend, Time Magazine, December 10, 2007)
• To compound the problem, in 2001 the moderate rise in indebtedness exploded into a spectacular binge in mortgage and home-equity lending. It started with super-low interest rates that kept spending rising even as the tech boom of the late 1990s collapsed. For example, home loans were made to people who had little hope of paying them back unless they won the lottery or their homes skyrocketed in value. Economist Hyman Minsky called these people “Ponzi borrowers”, referencing the pyramid-scheme, because once the banks got sloppy handing out Ponzi loans, a financial crisis was inevitable. This is what happened in 2006. (The End of Spend, Time Magazine, December 10, 2007)
• If the damage is restricted to just the U.S. mortgage markets, it is possible that there could be a $2 trillion reduction in the supply of loans, according to Goldman Sachs economist Jan Hatzius. That’s about 14% of U.S. GDP and more than enough to bring on a recession. (The End of Spend, Time Magazine, December 10, 2007)