The great American mortgage casino – How the Goldman case is about the broken down system that allowed massive gambling in America’s housing market for the last decade. Average sales price down because distress sales still account for 30 percent of home sales nationwide.

The case against Goldman Sachs is the ultimate conclusion to a decade long housing and gambling bubble fueled by easy money, no-documentation loans, and fraud spurred lending.  While the investment banks nitpick whether a fraud was actually committed, many Americans are getting their first primetime dosage of how corrupt and absurd the crony banker system has become.  To sum up the situation, Goldman helped hedge fund billionaire John Paulson find the ultimate toxic housing bet.  Through various parties, it is alleged that Paulson pushed for certain undesirable toxic mortgages to be part of a giant pool of mortgages that unbeknownst to Goldman clients (the issue at hand), Paulson was making the ultimate short bet.  Goldman collected fees upfront, Paulson made out like a bandit, and someone got the short end of the stick.

Wall Street is so out of touch with how bad things are in the real economy that they are fighting on the semantics if fraud actually occurred.  But to many Americans watching this circus, they are wondering how in the world someone could make billions of dollars by betting against the implosion of the American housing market (a market where 69 percent at one point owned a home).  That is the disturbing element now being leaked into the market and psyche of Americans.  Goldman was one of those lucky banks that received a nice chunk of the trillions in bailout money pumped out by the Federal Reserve and U.S. Treasury. So what people are coming to grips with is the idea that the government essentially bailed out the decade long gambling spree of the biggest cronies we have seen in modern finance.  Who benefitted from this kind of deal?  The bets in fact, actually made things worse.  In order to satisfy this gambling spree and make it even bigger, the message was sent out (with the implicit desire from Paulson and Goldman for junk mortgages) to brokers on the streets who kept pushing out option ARMs, Alt-As, and every other piece of crap we have come to witness so they can add it to one giant bet.  It would be one thing if it was only Goldman but virtually every investment bank got in the game.

So where are we today?  The market is still in complete disarray:

Source:  First American Core Logic

The latest data shows that in January of 2010 the U.S. market with all of its home sales, had 29 percent of all these sales come from the distress pool.  And as you can see from the chart above, a large number of distress sales will cut into the average sales price.  That recent bump has come from artificial stimulus through the tax credit, HAMP stalling, and the Federal Reserve buying $1.25 trillion in mortgage backed securities keeping mortgage rates artificially low.  But these things can’t last (the tax credit as of today has expired for new home purchases).

What is hard to understand from a psychological standpoint is how people can think things are good when we have over 7 million mortgages that are either 30+ days late or in some stage of foreclosure?  We are, as of today even with all these new measures, near the peak of the foreclosure problem.  Last month was the highest foreclosure filing month ever recorded!  This is not good.  How someone can interpret this as good news really baffles the senses.  Until that distress percentage creeps down into the single digits, the market is highly volatile.

If you think mortgage fraud has gone away because option ARMs and sub-prime mortgages have gone the way of the dinosaurs, think again:

Source:  CNN

“The report described several types of fraud that were detected most often. These include so-called “liar” loans, in which mortgage professionals knowingly listed false income claims for borrowers; inflated appraisals, in which mortgage loan officers or brokers pressure appraisers to overvalue a home so it would qualify for a bigger mortgage; and false occupancy claims, which is when buyers claim they will live in a home but are actually buying it for investment purposes.”

It isn’t like we have flushed out the industry with new rules and sensible financial regulation so why would we expect anything different?  And what a stunner that California ranks as number three in the nation for mortgage fraud.

Some of the hardest hit areas are in the “fab four” states of California, Florida, Arizona, and Nevada:

Source:  First American Core Logic

Riverside, the largest city in the Inland Empire had a distress sales rate of over 60 percent (the only large area to have this figure even beating out Detroit Michigan).  Aside from looking at this data as just a statistic, think of each family and household that is struggling to make their mortgage payments.  People don’t want to lose their homes (typically).  Sure we have a unique market in California where thousands of homeowners are strategically walking away from their homes even though they have enough income to pay their bills.  But the bulk of these distress cases are Americans that have lost jobs, have seen their mortgages recast/reset, or have seen their hours cut back.  1 out of 4 Americans with a mortgage is underwater on their mortgage.  And that is why the amount of equity Americans have in their home is near an all time low:

Source:  Calculated Risk

People forget that the housing bubble occurred at an arms distance.  How so?  Well follow the chain:

Borrower > (take on toxic loan with the hope that they would flip/sell before the mortgage payment went higher ideally with a much higher price).

Mortgage Broker > (didn’t care if you were unable to pay mortgage 1 year later, they get their commission upfront and higher for the more toxic loans).

Wall Street > (once they sliced it and diced it into crappy mortgage backed securities or other junk like CDOs, it was off their hands but not without a big fee – then they bet on it).

So who really was responsible for things once they went bust?  You and everyone else in this country.  Millions of borrowers have now lost their homes.  Mortgage brokers and lenders are now fighting for small spots to push out government backed loans.  Wall Street was the last untouched party but only thanks to trillions in bailout dollars.  Yet it looks like this last bastion of protection is being eroded away with the push against Goldman, the number one investment bank on Wall Street.

I stumbled upon an article from Dr. John Grohol over at PsychCentral showing the most heavily prescribed psychiatric medications in the U.S.:

From 2005 to 2009, the biggest jump occurred with Xanax, a medication that is largely aimed at helping calm anxiety and anxiety associated conditions.  44 million of these prescriptions were given out in 2009.  Without a doubt this economic recession is exacerbating underlying issues with many Americans (Xanax prescriptions jumped 29% from 2005 to 2009 even though our population only increased by 4%).

I look at indicators like this, or jobs, wages, cost of health care, food, and so far I haven’t seen what I would expect after pumping trillions of dollars into the economy.  The typical American family has seen very little relief or help.  Sure, Wall Street is up by over 70+ percent but that is because most of the money went to the crony bankers.  And now the investment banks and Treasury are trying to say how great we are doing with TARP and it is going to cost much less than expected.  Yet they don’t talk about the great mortgage casino:

$1.25 trillion in mortgage backed securities purchased by the Federal Reserve

$1 trillion in other loans and questionable debt the Fed took on through the alphabet soup of programs

$125+ billion to Fannie Mae and Freddie Mac that continue to support loans even though mortgage fraud is still rampant

4 out of 10 loans is now insured by the FHA which is seeing record defaults and is likely to see a bailout soon

Converting i-banks like Goldman and Morgan Stanley into bank holding companies to have access to the Fed so they can gamble even more

AIG?  $47.5 Billion and a big chunk of this went straight through to Goldman for additional bad bets (do you notice how often we use bets as if we are talking about a bad gambler in Vegas?)

Wells Fargo                         $25 billion

Bank of America               $45 billion

JP Morgan Chase             $25 billion

GMAC $16.3 billion

GM  $50 billion

And a long list of other items.  So people aren’t buying that absurd spin that the cost will be so small:

“(Moneynews) One Treasury estimate put a cost of $87 billion on the financial bailout, well below the $250 billion the Congressional Budget Office estimated last year or other analyses that put the all-in number at $1 trillion or more.

“If you are going to do a ledger, you have to do a full and complete ledger,” Whalen told The New York Times.

“To talk about making money on short-term transactions with the TARP while you have this huge cost to the nation is incongruous.”

Analysts say a major factor missing from Treasury’s math is the huge transfer of wealth from investors to banks that resulted from the Federal Reserve’s near-zero interest-rate policy.

Banks benefit because they earn fat profits on the spread between what they pay for their deposits and what they reap on their loans, especially credit cards, which have a current average rate of 14 percent.

Savers and investors lose, especially those on fixed incomes.”

Just like people look back on Tulip Mania or the technology bubble, people will be asking how in the world did we allow so much gambling to take place with mortgages?  But more importantly, they’ll be asking why we didn’t reform and fix such an obvious mistake even after so much economic pain was unleashed.

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39 Responses to “The great American mortgage casino – How the Goldman case is about the broken down system that allowed massive gambling in America’s housing market for the last decade. Average sales price down because distress sales still account for 30 percent of home sales nationwide.”

  • It is B+rry’s job to block meaningful reform so vampire squids like GS can continue to feed on the taxpayer.

  • I still remember when Wall Street got into the mortgage business around 2002. The rules of prudent lending went out the window in very short order. I knew this would be big trouble.

  • The year 2002 was when the housing prices took off like crazy. I remember we had to move to a new rental. The condos and HUDs in Hacienda Heights at that time was asking for $160K to $180K (Spring 2002). Now they are still asking for about 2.5 times of that amount. If the real wages have not increased from 2002 to now, why should people be paying more than double of the price. The interest rate was over 7% at the time, which prompts people to put down for money to lower monthly payment and which also ensures people with equity. I think the price has to go down more. But it will take years with all the government intervention.

  • Hunkerndown in San Jose

    I was struck by two things about the Goldman hearings.

    The first was the senators’ statements about the benefits to society of the stock brokers role in funelling money to productive enterprise. This is right on target and something most of us have forgotten. Instead of investing we’ve become gamblers in the wallstreet casino. Making a profitable trade has been substituted for making a smart and informed investment. After the 1929 stock market crash the very same conclusion was made by our government. In the aftermath, it decided there needed to be rules and mechanisms to futher the interests of investors, the bank depositors, and access to capital markets by business. That is why we have the SEC, and GAAP, to provide transparency so investors could make informed investing in business. Those standards seem to have taken a major holiday over the past several years. The FDIC and Glass Segal act were put there to protect depositors from losing their money when banks made too many bad investments and went belly up. Glass Segal limited bank’s role to lending activities thereby reducing the FDIC’s risk of payout in bank failures. Is it any wonder that the FDIC is itself close to failure after banks were allowed to play with depositors money at the casino with the repeal of Glass Segal? Who the hell came up with that brilliant idea?

    The other thing I was struck by was Goldman’s utter arogance acting like what they were saying was too sophisticated for the average investor or even the senators to understand. So they attempted to use this to say that the investors in abicus were just as sophisticated absolving Goldman of any blame. The SEC demands that investors are entitled to all material facts surrounding it’s potential investment. Disclosure of these material facts are not just nitpicky regulations. They are central to the SEC’s purpose. Take Martha Stewart for example. All she did was sell shares on a tip by an insider; however, by acting on this tip she became an insider herself and was supposed to file paperwork stating she was an insider making a trade. Since insiders have to file before they trade do you think her trade would have made her as much money? Martha has no excuse, she worked as a broker and knew the rules. Goldman says it didn’t have to disclose Paulsen’s shorting of abacus. Paulsen either selected some or all the Mbs the cdo was based on. Was this a material fact? You bet. Was Paulsen an insider in abacus? You bet. Did Goldman disclose that Paulsen was an insider who constructed abacus and was shorting it? No, they claim it was not nessessary to disclose who was shorting it. Wrong, because Paulsen was the ultimate insider- he’s the one who filled the bag with shit. And Goldman knew it. The fact that no charges have been filed against Paulsen to me is surprising. He was central to this flimflam. And it is also telling that fabratte tourre is no longer in this country. I’m sure a perpwalk would just ruin fab fab’s whole day. It will be interesting to see who goes to prison over this.

  • Robin Thomas

    No, it will be infuriating to see who doesn’t go to prison over this.
    They’ve had a slap on the hands, and my guess is that’s all they’re gonna get.

  • Some of us do really want the bank to finally take our homes. Generally people who bought in 05/06 just want out. I’d really love to see data of neighborhoods that were built in 05/06 especially in the Inland Empire area. I know mine was built in that timeframe and I’d say the foreclosure rate is 70-90% of all homes in a 3 year period(if you include every in foreclosure right now). Some houses have even been foreclosed on twice in 3 years. I guess I’d stay in my place if they would write the mortgage down somewhere in the ballpark (125% LTV as right now I’m at 250% LTV) of what the place is worth, but otherwise for the love of god take my home. Its been 17 months of non-payment and I am ready to move and have this over with.

  • Prosecuting and holding people accountable for their actions is so yesterday.
    Good that we have become enlightened and compassionate.
    Who are we to judge?

  • Real wages have increased since 2002 for teachers and other government workers- they get annual cost of living raises, on top of regular raises.

  • Grant Cooley

    Anyone who think the real economy is improving needs to take a road trip.
    We were in Carlsbad, CA. this week. Oceanside affluent area, normally lots of tourists.
    1. Many of the small stores have closed or are going out of business.
    2. We went to a locally owned Italian restaurant. About 50 tables. At 7:30 at night, we were the ONLY patrons, for about an hour, until 2 other couples showed up.
    3. This is going to get VERY, very bad.

  • If it were’nt for the fact the govt employs so many people, directly and indirectly, and injects so much money into our economy via credits,etc…..we’d be in a full blown depression right now. Real wages have not risen since 1999. Even if the govt achieves its goal of devaluing the US$, it wont change the fact that wages will not support real estate prices to rise. That’ll be a great combo, houses further devaluation while inflation ramps up on commodities like food and energy.

  • Kid Charlamagne

    What if everything you thought was true was instead a lie? Some are still waiting for a 10% dip so they can buy an RHG with granite counter tops and faux trash-cans. Folks, don’t get yourself into something you can’t get out of and don’t part with your cash right now. Something very big is imminent.
    I know you can’t believe it, but WW II was fought over this very thing. The Goldmen had their tentacles all through Europe and the States and the final solution was to rid them or die trying. Can you ever believe we may have been on the wrong side?
    History is written by the victors. don’t know if it’s true, but what is happening now lends credence. But what is true anymore? Fox News? CNBC? Moody’s? US Gov? Blankfien? Warren Buffet (huge Goldman position, trust him on GS?) Oil rig just blows up. Really. Just somebody didn’t put out a cigarette? BS. Something is not right here. Didn’t a whole friggin refinery blow up a couple springs ago? There’s something in the woodpile and it ain’t right.
    Doc’s making a lot of sense. And the dung may be about to hit the fan.


    Instead of investing in real estate, you would probably be better off buying pharmaceutical stocks, at least according to the above chart.
    We are watching America lose it’s “Superpower of the world” status in slow motion.

  • Grant Cooley,
    Thanks for your observations. My husband and I have not had a road trip in a while …we mostly stay around home (our 2 bedroom 1 bath duplex rental in old town Orange) while watching many around us still live in the bubble mentality. it was pretty much the same when we lived in LA a year ago…We have exhausted ourselves over the last 8 years as working professional peasants trying to save and wait for the opportunity to “properly” afford an average home in a decent area of LA or OC. What were we thinking? On the bright side our decisions have not jeopardized our family unit and the excellent food that we prepare and eat which has given us pretty good health! – But we still pay very highly for health insurance…oh well!

  • Kid Charlamagne

    No, total. There is nothing like the crony realestate investment. Here’s how it works:
    Buy an RHG with virtually nothing down. Buy another. Rent the first, don’t make payments on either and live off the rent until that one’s foreclosed, then the next. Walk away Renea, you won’t see me follow you back home. That’s the game. Or, save your money, play by the rules, squeal like a pig, cuz that’s what’s coming around again. Doc’s right. What’s changed? Only it seems the gov is in on the scheme now with GSE’s. Who bails out Sam though?

  • sg…..

    The reason those properties are bringing 2.5 times what they did in 2002 is that they are being bought up by cash buyers who don’t give a crap about interest rates. I know it’s crazy, but that is the current reality. Forget about OUR wages. You are competing with cash or almost all-cash buyers. You will drive yourself nuts thinking about it!

  • at 65 and renting, buying a house and all the assorted garbage ( taxes, ins, maintenance) plus paying the exorbanent interest for the privilage of living in a neighborhood that started going to shit before you stood up at the signing is the hieght of dumbshitology. when all the dust settles on this ripoff, we are all going to be in the street, along with the highrollers where at least we can throw our shit at each other from our treehouses. highrollers in town here score 16 in a town of pop. two thousand with shiney ,brand new NOD’S. 4/16/10.

  • Robin Thomas

    I’m surprised that your post was allowed to stay,
    because it’s just a little too on the nose.

  • If people think being trapped in a house is bad, wait til they see what it’s like to be trapped by anti-depressants and benzo’s. Quitting smoking is 1000x easier than getting off klonopin etc.

    I knew it would come to this.

    This is where the real enslavement begins.

    I speak from experience.

  • Buffett just came out and said that housing will probably recover next year. If the govt stays out of it….WTF? The only reason it’s not in the complete basement is due to intervention from the govt. Doesnt he own a bunch of WFC? He should look at the non performing HELOCs and mortgages more closely.

  • At least Japan had a believable reason-lack of land. But here?? I used to live in the bay area during the dot com years and the housing bubble years. I remember Tracy , way out in the east bay. 10 acre horse ranches were going for under 300k. All of a sudden developers swooped in and built up houses and sold Mcmansions for 600k+. I was scratching my head trying to figure it out. Every direction you look out, there is empty land-why on earth would someone think this is worth 600k+, when just two years ago, you could get 10 acres, a ranch, fences,a ranch home, guest house etc. for under 300k very easily???

    I think unless people are forced to face the music, house prices will stay high. In places like NV and AZ they have come down a lot. I was stunned at the prices in NV-for 30k you can get a decent condo. But here, I think people are still in lala land..

  • @ Bob: My wages have increased too. You gonna launch a pathetic jealous tirade over that too?
    @ Kid: You have got to be kidding. Are you honestly trying to insinuate that Germany was on the right side of WWII? You think Hitler was the good guy and support forced slave labor and killing over 6 million people in concentration camps? Please tell me you were joking.

  • Another fantastic article, Dr. HB. Although, I was hoping you could clarify on figure #2 (Distressed Home Sale Shares by state) – it isn’t clear to me what time period that is covering…is it for the month of January, February, 2010 Q1, or full year 2009?

  • “If people think being trapped in a house is bad, wait til they see what it’s like to be trapped by anti-depressants and benzo’s. Quitting smoking is 1000x easier than getting off klonopin etc.”

    Yes, that’s what I picked up from the doctor’s chart of most prescribed drugs also. I don’t take drugs myself but I’ve seen it. Anti-depressants themselves are not addictive but they can have a bad withdrawal. HOWEVER, drugs like Xanax (the #1 drug on the doctor’s chart) ARE addictive. Maybe it’s not just selling so well just because everyone is anxious but also because so many are addicted.

  • @Kid “I know you can’t believe it, but WW II was fought over this very thing. The Goldmen had their tentacles all through Europe and the States and the final solution was to rid them or die trying. Can you ever believe we may have been on the wrong side?”

    You are apparently utterly detached from both present reality and past history, but the above comment is beyond the pale. You should get punched in the nose for that remark.

  • Kid Charlemagne

    @Gael I know it sounds crazy, but do some research. It’s hard to find the truth, and how do you know which is true. Just saying “someone is a madman” is a copout. There are reasons why things happen. A lie told enough usurps the truth. Mozilla didn’t accidentally destroy all those families–he’s a greedy f’n bastard that should be rotting in prison instead of basking in billions.
    The point is, the banking industry is actually hostile to the general population and seem to take sport in destroying all of us. They don’t need the money–they are already fabulously rich. It’s a game to them. And like suckers at a carnival, we think this time we’re going to win the game.

  • Kid Charlemagne

    Buffet seems like such a nice guy with such a great personality–seems everyone loves the guy. Not everyone. There are a lot of folks that think there’s a lot more to Bershire than just the PR stuff. Anyone in bed with the crony bankers surely has goldmenella by now. The guy is old and rich and should be just having fun–but he’s addicted to the game and that’s all he cares about is more money. He’s probably trying to find a bank in heaven to open up an IRA account. Now that that Mexican guy has more loot, he’s probably trying to find a way to get back on top, cuz everyone knows only one wins the game, the rest are losers.

  • caboy, 30K condo in LV ( and 50K houses) will destroy the 150K houses in Riverside and this will destroy decent neighborhoods and they will destroy Westside and Orange beaches… It just takes a bigger bucket of popcorn than I estimated in the beginning. In the long run all that matters is economic fundamentals…
    D1, where were the all-cash buyers in 2002 when the condos were dirty cheap (160K from sd post), why they were so scared to buy then and flock now at 2.5 times this price? Dude, you are troll what you are doing around here?

  • “Millions of borrowers have now lost their homes. ”
    Well, shoot, i hope they find them!!!
    I’m just pointing out the ridiculousness of your statement Dr HB. The bank onwned the home all along. Not until a borrower pays-off the loan Over time or with some other windfall, is it theirs. Even a home owned free and clear isnt really ours, as the government taxes the crap out of you FOREVER via the property tax.

  • @Kid – you are taking advantage of hard times to spread utter evil.
    Hitler killed millions of innocent Jews, retarded people, Gypsies, homosexuals, and slavs. many German priests were sent to concentration camps when they tried to defend retarded people. not to mention that he started a war that led to the death of millions of combatants and bystanders. saying we were on the wrong side is just sick.
    the crucial thing for us all to do is to make sure that guilty INDIVIDUALS are punished this time around, by way of the legal system. it will take time and effort and persistence.
    Of course Buffett is a scumball. that’s not news.

  • The right side of the war is the one of the winner at the end. When the wars is going on the right side is not clear…I don’t know a war which have been different. In WWII the main reason for starting it on the German side ( so on Japan also) was that the colonial world was set wrongly, France, UK ( USA on same side cuz is a natural continuation of the British empire) had everything and everything Germany, Japan and Italy nothing ( Italy almost nothing). How fair is this? How good of excuse this would make for starting the war if they have ended winners? American populace is infantile beyond believe to thing that there is any high moral reasons here… that is why only few people to call nazies… Pearl Harbour was a set up similar to 9/11 – American intelligence had advance information, but gov did nothing in order to make outrage of the attack and get US involved into the war ( which did not concern us, it was far far away) and this was not to save Jews or anybody else or help somebody to win. It was made so US can be on the table where winners sit in the post war world, and judge … Do not get me wrong Germans did horrible crimes and USA motifs are no excuse for them

  • original thinker

    Hello, D1.

    When the last “cash buyer” buys… all the cash buyers
    lose their cash! I’m sure they’ll drive themselves
    nuts thinking about it. Couldn’t happen to a more
    smug bunch.

  • Back to the topic at hand –

    I live in a 22 year old, very middle class subdivision, in the suburbs of Atlanta which sold for 120K in 1988. I have never refinanced, cashed-out, or anything of that sort. Same original mortgage, just different loan balance.
    In it’s best day, back around 2007, houses were selling for 190-200K, which if you do the inflation math, is just about right.

    In my neighborhood, 75% of the sales in the last year and a half have been BANK SALES.

    Now granted, that is 8 of the only 12 sales, but quite representative of the current market.

    The three other neighborhoods the tax assessor uses to value the property show the same ratios – well above 50-60%.

    There have been very few of what are referred to as “arms length transactions” by which to properly gauge the property values. The values are now determined by the banks dumpnig property to their crony friends at whatever prices to dispose of them. There have also been quite few stories here locally about the inside deals done by the banksters making these sweetheart deals with their buddies, all the while completely destroying the resale market and our equity for the rest of us. The resale market is just completely dysfunctional.

    The only good news if you will is that for purposes of property taxes, my property has now been valued at 1993 levels. But that’s also very bad news for the local school districts and governments who are laying off hundreds and thousands now that the so-called stimulus, budget filling funds have run their course. Although, in reality, that is not good news since here in this Atlanta suburb, we never saw anything much above 3% increases YoY. So in effect, at this time in history, were I to try and sell, I have lost 17 years worth of appreciation. And this from a house that really never saw much in the way of appreciation beyond rates of inflation.

    I’d like to think the bottom has been reached in the pricing of these bank sales, but everytime I do I see one where the bankster has dropped the price by 30 grand to get it off the books. But this destroys the market for the remaining homeowners. By my calculations, it will be close to never for us to recover from this destruction of equity. Because first and foremost, for the repair process to begin, the foreclosures must revert to more normal levels and here in GA, we continue to set monthly foreclosure records.

    I did some quick math on my 120 house subdivision.
    There have been some 20 bank dumps of property resulting in the properties losing upwards of 30% of their values.
    For the 20 people who purchased said properties, they might see an increase on paper of 20-30 K for a total of 400-500 K.
    But for the other 100 people, who on average lost 50K in equity, that is a combined loss of $5 million.
    And that is is one small neighborhood, in one small county, in one small state.
    Multiply those numbers.

    I’m sure it will stabilize and maybe even improve at some point.
    The question one has to ask, and try to calculate, is what year or how much time would it take to get back to even?
    When will the foreclosure rate revert from the current 75% to a more normal 3-4% levels?
    What will the bottom in the pricing trough be?
    Once the madness stops, what will be the appreciation rates?

    And all this is for a house that is hardly overleveraged, or ever saw anything close to the faux appreciation levels seens in some of the Fab 4 states, but simply a place to live.

  • Kid Charlemagne

    I was shocked when I read it too. I read Victor Frankel and all the rest. I’ve heard the stories and propoganda all my life too. Couldn’t believe it. Didn’t want to believe it. So I dug and dug and found out there’s a whole other side to the story. I’m not saying Hitler was a great guy. I’m saying the Bankers are programmed to make more and more money and they will not stop. They make sport of manipulating the general populace, and the housing bubble is just another example of how they will destroy the pawns while they play their little game of chess. How much is enough? Look at Buffet–it’s never enough.
    The housing bubble was real and it ain’t over yet. Dump your life savings into a home that cost’s 3 times the intrinsic value? States are really broke. Think they won’t raise taxes like New Jersey? Think this is all going to wash out? Think again. Think long and hard. It’s a lot easier to get into an RHG than it is to get out with your money intact.

  • @boywonder
    Holy housing hell, Batman. And Atlanta certainly has a thriving economy, without going out on a limb. And I always thought buying a home is a great investment. Actually, as always, we’re just buying a house that sits in the rain and gets older. Cars always increase in intrinsic value too. The more you dreve ’em, the better they get. Of course they don’t, but the point is the same. We’re all renters under the sun. We desperately try to hold onto things, but we’re just here for a while. Enjoy the cruise. We’ll be back in Miami before you know it…

  • Well 1st of all, grats to you DG on being able to save money for your move. Many aren’t even able to do that and they get foreclosed upon in 6 months. Just learn the lesson they wanted us to learn. Don’t buy, that’s only for the overlords and those that game the system.

    Try to live without ANY credit, f the banksters.

  • Original thinker…..

    I don’t know. These folks buy like there is no tomorrow! It is nuts! I think they are betting on a dollar crash.

  • Dr. HB, I assume Figure 2 is for January 2010, as you reference it in the section above it (although the figure above Figure 2 indicates the Fraud index by state for 2009…I just want to make sure we have specifics so as to avoid challenges to the data or dismissal for being “vague”.

    And guys, how are these for some interesting reading, fresh from the housing wire.

    “93% of RE markets are more stable and at less risk of further losses blah blah blah”…of course, check out where the other 7% is – in all of our favorite overbuilt and over speculated areas:

    Commercial delinquency rates soar to over 8%:

    Strategic defaults movin’ on up…one independent review from the Univ. of Chicago versus Morgan Stanley’s “less pessmistic” view:


  • There has to be parity between cost of renting and cost of buying. If cost of buying (after tax interest and taxes) exceeds rental of comparable housing unit, the property is over priced. DrH has pointed this fundamental economic truth many times.

    I dont live in a bubble state. I didnt take out an option ARM to overleverage my home. Housing prices in my area probably 10% below peak values. But the financial crisis and drop in interest rates cut my mortgage interest expense by 38% and my cost of ownership is probably now 50% of comparable cost to rent.

    I blame the banks and the realtors for the “you cant afford not to buy, no money down” phenomenon that caused this bubble. Cheap money = overpriced goods.
    No money down = speculation.

    Nothing new under the sun in this crisis. It has happened before, will happen again.

    Require purchasers to put 20% down and lenders to keep 10% first loss position on any mortgage. That will eliminate the next bubble, or constrain it.

    Since 1933, its been illegal to lend more than 50% of the value of public stocks. Why can you borrow 100% of real estate, a more volatile less liquid asset?

  • freemarketeer

    After wading through the finger pointing, hyperbole, and general mud slinging at the usual suspects, let’s take a look at what someone has to say that can calmly, coolly and dispassionately examine the subject, John Mauldin.

    From a recent article of his:

    “[T]he CDO in the Goldman case was not this type of CDO [with a direct link to actual mortgages]. It was hard to find enough BBB pieces to put together a CDO of the type described above, and the demand was high. Remember, everyone knew that housing could only go up. So, what’s an investment bank to do? They create a synthetic CDO. Follow this closely. The various investment banks – it was way more than just Goldman; rumors are it was up to 16 of them – would construct an artificial CDO fund based on the performance of BBB tranches in other deals.

    Let me see if I can simplify this. It is as if I had a very negative view about a particular industry for which there was no future or index or liquid security. We could go to an investment bank and ask them to create a “hypothetical” index that would mirror the performance of this industry. I would be willing to short that index. But unless the bank wanted to be long that index, they would have to find a buyer who would take the long position. Presumably the buyer would have a different view than me.

    Now, by definition there has to be a short for the long, and vice versa. This is a synthetic index. It exists only as a spreadsheet and performs in conjunction with the components it’s modeled upon.

    Numerous hedge funds did not think the rating agencies knew what they were talking about when it came to the mortgage ratings. They also believed we were in a housing bubble. So they went to a number of investment banks and asked them to construct synthetic (derivative) CDOs that they could short. And there were buyers on the other side who wanted the yield, who trusted the agencies, and who believed that housing could only go up.

    As to the Goldman deal, the buyers had to know there was someone short on the other side. By definition there was a short. Besides, they had a guarantee from ACA on the AAA portion (which of course went bad, as I wrote about later that year) – there was a guaranteed AAA yield a few points higher than with normal AAA debt. What could be better? Except of course that it was too good to be true. Learn a lesson, gentle reader. Don’t reach for yield.

    The hedge funds that shorted the synthetic CDOs took real risk. They had to pay the interest on the underlying tranches to the investors who were long. And if the housing market continued to rise, and the bubble did not burst, they could easily lose a lot, if not all, of their money. No one knows when a bubble will burst. The markets can be irrational longer than you can remain solvent.”

    In other words, the financial market created a product THAT SOMEONE WANTED TO BUY. That’s important. Even though Goldman Sachs and the Band of 16 might have chosen to short these synthetic CDOs, someone else – I’m sure a lot of them being professional pension fund managers desperately seeking to meet completely unrealistic yield targets of over 7% – were confident enough in the rocket ride of home prices continuing for at least long enough for them to reap the benefits so as to justify these investments. Someone was going to lose money on that bet but each side of the transaction was convinced they were right. Unfortunately, one side had to lose. It turned out to be the “longs.” Conspiricism is unnecessary and distracting.

    The bottom line to all this is clear. In a savings and pension investing climate that was (and is) desperate for yield to satisfy the ravenous Boomer bulge retirement demand, the creation of higher and higher risk investment instruments and resultant bubbles was a foregone conclusion. What brought it to a halt was a combination of many factors including the end of the line for greedy real estate flippers, the consumers of many of these now “toxic” loan instruments, once they found that they had run out of flippees. Also a foregone conclusion is the inevitability of the “crisis era” of generational cycles every 80 or so years. See the great debt buildup leading to the Great Depression, as well as the other 80 year crises – the Civil War and the American Revolution – for examples in the U.S.

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