The Vultures Circle

A lot of stories about mortgage fraud are coming out this week. The incredulous tone of the articles would be funny if it were tongue-in-cheek. But, the fact that they are serious about it makes me shake my head. Is anyone surprised that applicants lied on their loan applications? Is it really a shock that mortgage brokers encouraged them to do it?

The housing market was a sure thing, and everyone wanted in on the action. So people lied a little on their applications. It wouldn't matter. In a few months, the appreciation on the properties would more than make that lie a reality. So, it wasn't really lying. It was more like pre-stating the facts... Enron style corporate accounting for the everyman.

Only, the market tanked, and all of a sudden people started losing money. Smiling faces turned into pointing fingers. And blame had to be assessed. So who would be left holding the bag?

Well, you know the saying. Sh*t rolls down hill. So, it's more than likely that the lenders will sue the mortgage brokers, the mortgage brokers will sue the borrowers, and the borrowers will sue... no one because they will be too broke to afford it.

Well, that's maybe not entirely true. One angle that I expect to hear much more about in the coming months is appraisal fraud. When I lived in Hawaii, I frequently heard mortgage brokers talking about how 'their guy' could 'make it appraise.' You hear a lot of sniffling about adjustable rate mortgages, but inflated appraisals are responsible for a lot of the problem as well.

Unfortunately, if people dont even read the terms of their loan carefully enough to understand them, do you really think they will request a copy of the appraisal? Probably not.

The point being, expect to hear more and more stories of fraud and litigation as this bubble continues to burst. The lawyers and the crooks are the vultures of our times, and when they start circling, you can bet it's not a sign of good things to come.

The Five Stages of Grief

We're hearing talks of soft landings again. It's amazing how readily people will accept evidence that supports either their hopes or fears. The September data has a lot of people optimistic again. But month to month variations dont change the fundamentals that underlie the problem.

It made me think of the five stages of grief. You know: Denial. Anger. Bargaining. Depression. Acceptance.

There is a lot of denial going on right now. You can see it in the quotes that we've assembled below, or in the stories coming out of the mill. Stories that say things like, "Well, THOSE people can't afford their houses, but here in thats not the case." Unfortunately, that type of thinking no longer applies. There may not be a national housing market, but there is a national economy, and what happens in one part of it affects the rest.

There is also a lot of anger. Much of it is in the form of, "Poor Johnny and his family are facing foreclosure. Evil lenders tricked them into taking out a loan they didn't understand and couldn't afford. Now, they can't pay the note and will be out on the street. Those evil !"

But, with the recent resurgence in "soft landing" speak, and the soothing cooing tones coming out of the Fed, it appears that we have entered the bargaining phase. "Yes, yes... we had a little boo boo... but it's going to be all better, see?"

I don't buy it. You can look at all the numbers you want. I still don't believe it. I remember when I did a lot of day trading. I spent a lot of time learning technical analysis, and I was totally infatuated with numbers, charts, lines, graphs, candles, and all the rest of that stuff. I thought I had reached a decent level of proficiency, too.

Then, I read a saying by a wise old investor. "I never met a rich technical analyst." I objected. I knew lots of them! But, rich is relative. And in this guy's world, none of the people I knew even existed. He meant wealthy. And his point was that you can draw all the lines you want, and look at all the numbers you want. But at the end of the day, you can't escape the fundamental analysis. In the long term, fundamentals always win.

I didn't want to believe it at the time. But since then, I have seen that there is wisdom in his words. At the end of the day, up is up, down is down, and at some point, you have to pay the piper.

But we're not quite there yet. Remember, bubbles last longer than people think they will. The people who predicted a stock market bust had already been laughed out of a job by the time it actually hit in 1929. But crashes last longer than people think, as well. So, I would take the news of the bubbles demise with a grain of salt.

Up to the Minute Housing News and Information

If you are interested in getting up to the minute, unbiased coverage of the housing market, check out Crash Feedbacc. Updated around the clock by yours truly for your viewing pleasure. Mahalos!

Housing Bubble vs. Great Depression Deathmatch

Click the links on the right to read the quotes. Mahalos!

Alan G or Ali G?

"There is a good chance of coming out of this in good shape, but average housing prices are likely to be down this year relative to 2005. I don't know, but I think the worst of this may well be over"

Someone must have shown Alan G. the housing video, because it looks like he's asking to be included. I know I'm not an 'expert' on these things, like A to the G, but the fact that the mortgage activity was up does not necessarily mean that all is well. He's basing this, in part, on some recent reports by the MBA saying mortgage activity is up. From the MBA web site:

The refinance share of mortgage activity increased to 44.5 percent of total applications from 43.9 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 29.8 percent of total applications from 28.8 percent the previous week.

Now, if you add those together, you see that ARM and refi activity accounted for 74.3% of the total applications. Does that sound like a healthy market to you?

NO!

That looks like a lot of people in trouble. I expected the refi activity... after all, a bunch of people are getting reset now on their ARMs, and their payments are blowing up. They want to take advantage of the low rates in order to try to stay afloat. But the ARMs? A bit surprising. ARMs are a big part of the reason that people are in trouble to begin with. But, as they say, desperate times call for desperate measures.

Anyway, if I'm reading the article correctly, the fact that almost 75% of activity was in refi and ARM products does not sound like the end of the bubble. It sounds like an indicator that the ish is about to hit the fan.

When? Who knows. Bubbles ALWAYS last longer than people predict. But, don't believe the hype... just because mortgage activity is up does not mean all is well. The type of activity is a key indicator of the underlying conditions, and if we are seeing refi's and ARM's products blowing up, then you can be sure more and more people are feeling the squeeze, getting desperate, and trying to stay above water.

Alan G or Ali G? Either way, the joke is on us. At least we know that MC Greenspan does a mean Irving Fisher impersonation.

Critical Milestone Reached

As everyone has probably heard by now, the DOW closed at 11,727.34, beating the record set way back in the dot com days. Maybe its me, but things sure don't feel as prosperous as they did back then. Still, breaking this record is psychologically important, if for no other reason than to finally put the bust behind us.

I read "The Next Great Bubble Boom" a while back, and even though the timing on some of those predictions was off, it looks like a lot of the calls made in the book by Dent are starting to happen. Oil is down, the Dow just peaked... and housing is flat at the moment. What does all that mean?

Well, if the book is to be believed, there won't be an overall crash just yet. But, there will be significant gnashing of teeth in certain segments of the housing market. Fundamentally, I believe that a crash of some sort is unavoidable. However, the timing of the crash is the hard thing to predict.

If you look back at the great depression, there were a lot of economists who predicted a great depression. The thing was, they were too early by several years. By the time the depression actually hit, they had all but been laughed out of a job by the people making money in stocks.

Still, it was little vindication for them to say, "I told you so" when the market finally did collapse. By then, everyone could see it for themselves, and it didn't matter.

Jump to the present.

There are a lot of people that look at the present situation and just think, "This can't last." Negative spending rates, current account deficit, you name it. But, something to keep in mind is that bubbles often last much longer than anyone thinks they can. Long enough to lure people into one last false sense of security.

The overall housing picture is not going to improve any time soon. But luckily for us, if the stock market keeps performing, we won't have to worry about it. We'll be able to turn our attention away, once again, and push the eventual settlement date down the road a bit further.

That might be good, or it might be bad. Me personally, I like to settle my debts up a soon as possible. It hurts more, but costs you less in the long term. Unfortunately, we have a nation that thinks the opposite. Play Now, Pay Later. Well, looks like the stock market might let us play for a little while longer.

And the smart people out there will take advantage of the respite and use it to get their homes in order.

The Market Wont Save Us

I've received a lot of emails from optimistic people who think the strength of the US stock market will somehow save the drooping housing market. Unfortunately, I dont see that happening. Although a strong stock market would have overall positive effects on the greater economy, the fundamentals involved with the housing bust can't be overcome by new highs on the exchange floor.

Think back to when the tech bubble burst. Did a booming housing market save it? Nope. All the speculators just jumped from one bubble to another. That's the same thing that's going to happen again. When / If A new record is set on the DOW, a new round of speculators will ride whatever wave ensues. But the bagholders in the housing market will still be holding their bags.

Some of the cash might find its way back to the market, but not before a lot of people get wiped out financially. So, don't count on the stock market to save the day when it comes to housing. Housing has had its day, and that day is ending. Remember, it took six years for tech to bounce back, and housing couldn't save it. Expect similar time frames for housing, regardless of what the stock market does.