As with Wednesday’s post that was the first real admission by the financial media that the systemic nature of the derivative crisis is looming above us all like Damocles’ sword, we’re starting to see more articles of just how bad the situation has truly gotten and that it is getting worse.
Like this morning’s earthquake in the U.S. heartland the threat is there and has been there for a long time…but we still act surprised when it happens.
Today’s tacit admissions expand on this week’s spotlighted problems, first, the sound of “jingle mail” is becoming a cacophony of catastrophe for the mortgage industry.
Increasing numbers of Americans are simply walking away from their houses and mortgages, increasing pressure on banks and the economy.
Now I don’t care which end of the political spectrum you’re on, that’s not a good lede to see.
Rapid house price falls in many parts of the United States will soon leave as many as one in five borrowers owing more on their loan than the house will fetch, removing at a stroke the single most powerful incentive to keep up with payments. The phenomenon of “walk aways” or “jingle mail,” so called because of the noise the house keys make in the envelope mailed to the bank, is hard to measure but shows every sign of gathering pace and having a substantial impact.
Jingle mail has now officially entered our lexicon of disaster, along with subprime mortgage, bailout, solvency, adjustable-rate mortgage, and monoline insurer.
Warnings about the jingle mail flood were given months ago, as well as posted by several folks in the comments. Those articles were advance warning then. They’re official warnings from the financial press now.
Wachovia went so far as to change its models on how quickly loans will go bad in the face of what it called “unprecedented” changes in consumer behavior.
“I don’t know where the tipping point is,” Wachovia chief risk officer Don Truslow told analysts on a conference call. “But somewhere when a borrower crosses the 100 percent loan to value, somewhere north of that…their propensity to just default and stop paying their mortgage rises dramatically and really accelerates up. It’s almost regardless of how they scored, say, on FICO or other kinds of credit characteristics.”
Think about that. As many as one in five homeowners either owe more than the house is worth or will soon be underwater as housing prices most likely continue to drop in 2008 and into 2009. How many of them will mail their keys in? How many of them will move to apartments or rental properties and drive rents up through demand? One in five homeowners is a staggering amount, we’re talking tens of millions here, enough to reshape the “ownership society” for a generation. If even ten percent of those folks walk away, that’s still 2% of total homes owned, still trillions worth of real estate being affected.
As was noted weeks and weeks ago, that was one of the many reasons why this recession was never going to be “short and mild”.
Mark Zandi of Moody’s Economy.com estimates that 10.6 million homeowners will have zero or negative equity by the end of June, or 21 percent of first mortgage holders.
The impact of a new wave of defaults will also be potentially important.
Banks and other investors in mortgages, as has been seen, will take further hits to their already weakened capital.
While few might shed tears for banks, this means a longer and deeper credit crunch.
It will also mean a wave of new properties hitting the real estate market, driving prices lower still, as banks seize and seek to sell the houses homeowners have fled.
To give a flavor of the impact, Zandi has estimated that every foreclosure on a neighborhood block reduces the value of all homes on that block by almost 1.5 percent.
Jingle mail is the next stage of the housing depression. It’s here and it’s growing quickly. It’s almost impossible to see what will pull housing out of its tailspin. When I say that the question now is “terrible recession or full-blown depression” this is one of the factors that will determine just how bad things will be. All indicators are that this will be horrendous, if not catastrophic.
The systemic nature of the banking crisis means that it won’t take much to collapse the entire system. And we’re seeing individual components collapse now at an increasing rate. As I’ve said before, it’s like organ failure in a human body. Too many organs give out, the entire body dies.
We’ve already seen one organ failure: the auction-rate market. It’s a small one comparatively at only a third of a trillion, but it’s the canary in the coal mine. And now states involved in those auctions are releasing the hounds.
Regulators are widening their probes into the collapse of the auction-rate securities market as state regulators from New York to Washington scrutinize how Wall Street peddled the bonds to investors and issuers.
New York Attorney General Andrew Cuomo subpoenaed 18 banks and securities firms including UBS AG and Merrill Lynch & Co. in an investigation that could lead to criminal charges, a person familiar with the probe said yesterday. Officials from nine other states formed a task force to determine whether brokers misrepresented the debt as an alternative to money-market investments when they sold it to individuals.
“To have subpoenas and the threat of criminal investigations raised suggests that somebody has made up their mind that there really are abuses there,” said Donald Langevoort, a former Securities and Exchange Commission attorney who now teaches securities law at Georgetown University in Washington. “It certainly suggests something more than regulatory curiosity.”
Officials are increasing their scrutiny after the $330 billion auction-rate market seized up in February amid the fallout from the subprime mortgage slump, leaving some issuers paying rates as high as 20 percent and investors frozen in the debt. The SEC said last week it is working with the Financial Industry Regulatory Authority to examine firms’ disclosures to clients who purchased the bonds.
Who was left holding the bag on these 20 percent interest rate loans? Why, the states themselves! They smell blood, it’s an election year, and it’s the taxpayers who are getting hurt here. The opening salvos in the war of the states versus the financials are on the way, and the financials are scared. To think they could be on the hook for another wave of hundreds of billions is making them green with nausea.
And here’s the real kicker. If states can sue the financials for misrepresentation and win, what’s stopping everybody else?
“We’re all getting complaints on a daily basis from retail investors and they all have the same the story: they were told by their brokers these were safe as cash and they’re not,” said Bryan Lantagne, the securities division director for Massachusetts Secretary of State William Galvin and head of the task force.
In New York, Cuomo is also asking for information about how bankers persuaded borrowers to issue the bonds and how the securities firms decided when to stop bidding in mid-February, the person familiar with the probe said. Dealers had routinely bought unwanted bonds at auctions to prevent failures for two decades.
The subpoenas were issued under the Martin Act, the person familiar with the probe said, giving New York investigators the ability to file criminal charges. The banks Cuomo subpoenaed include Merrill, UBS and JPMorgan Chase & Co., the person said.
Kris Kagel, a spokesman for Zurich-based UBS, and Stefania Signorelli for New York-based JPMorgan declined to comment, while Mark Herr, a spokesman for New York-based Merrill, said the company doesn’t comment on regulatory matters.
Those state Attorneys General (a phrase you’ll be seeing more of, Attorneys General), led by Andrew Cuomo, are coming for their money back. The financials are still facing serious solvency issues. Criminal charges against folks involved are not going to restore confidence in the industry.
We’re seeing states, local governments, and non-profits having to bid on their own auction rate securities just to try to drive the price down, but either way the taxpayer is stuck with the difference.
Millions of Americans walking away from their homes. Criminal charges for fraud. Solvency issues caused by hyper-leveraging in the credit crisis era. A massive loss of consumer and investor confidence. The financial industry is in for some rough times, and with it, all of America. The worst-case warnings sounded earlier are showing up as daily news articles in the major financial press, not just the blogs and analysts’ sites.
Be prepared.