Saturday, February 24, 2007

The American Dream of "Loan Ownership"

--Isn't it interesting how someone who owes the bank is called a "home owner"?

I had a particularly insightful friend who owned a very nice home in one of San Francisco's more desirable neighborhoods. Back in 2000, when asked if he owned his home, he used to answer, "No, I pay the bank for the right to maintain it for them."


So, while I've been away from the Internet I haven't been reading nearly as many conspiracy kook websites. Unfortunately, I didn't have cable tv either, so I wasn't I wasn't able to self-medicate away the voices in my head with a weekend marathon of"What's Happening?" reruns.

"So what are the voices saying, fuBarrio?"

They are saying that the unraveling that we've been predicting is underway.

"So why don't I see it fuBarrio?"

The answer is, because it's only just getting underway. Although the financial conditions that made this such a foregone conclusion have been in place for YEARS, the turn is only just now at hand.

"But, your predictions have been off in the past. Why should anyone listen to your paranoia now?"

Because this time the sky really is falling!!! :)

The reason that it isn't obvious to you yet is probably because of where you receive your information. As a public service to the three readers who read this blog now, I use the time afforded to me by my unemployment and partial disability settlement to bring you the BEST of all the and conspiracy nuts' information....kind of like a reader's digest of the universe of the "6 B's" crowd (bunkers-beans-bullets-bandaids-bottled water, and-bourbon).

"So what's going on that tells you the turn is at hand?"

Well for YEARS I've been scratching my head at the subprime mortgage market. Subprime, are the people who sell mortgages to Americans with bad credit ratings allowing them to get into overpriced stucco sh&t boxes.

For a lot of reasons, explained here previously, the subprime sellers of mortgages were involving themselves in the risky behaviour of putting people into loans that they knew the borrower had no chance of making good on.


Well, they weren't totally crazy. They made GREAT fees on these loans, and then packaged up the loans and resold them through "securitization" (big bundles) to larger institutions. The reasons these larger institutions would buy these dubious loans were that they were again packaged up and the risk was "hedged" away again....

....In fact, at this point, the risk has been packaged up and hedged away so many times that a good number of industry observers aren't even sure who exactly is holding the "bag" (so to speak) on these loans.

So why do I think it's starting to hit the fan? Well, subprime lending facilitators are starting to go out of business. As the lending standards tighten up on those most willing to lend to the most dubious it will create a series of chain reactions that will become a self-reinforcing cycle of falling asset prices and tightening credit.

At some point, if the tranches of higher quality paper get effected, the results could be catastrophic. The reason is, the higher quality paper is "geared" or leveraged in a much more aggressive way...The reason being that there is a much lower chance of default, theoretically.

I would opine in general that the people buying these securitized mortgage securities don't really have effective tools for evaluating the risk these securities are carrying with them. The smart ones, that do, have already hedged away the risk (theoretically) and taken a piece of the return in exchange for doing so.

In the end, if it ends badly enough, it will be shocking to everyone how many supposedly "safe" parking places for money were gearing in this low interest rate environment to increase returns on fixed asset pools and exposing themselves to joe-six-packs willingness and ability to continue paying increasing payments on a house that is already underwater and losing value daily.

....better clear the calendars of the banking committee members in congress now while they practice their best finger wagging and looks of shocked indignation when this festering turd comes to the surface in a very public way.

If you want to read more about what is going on already with the widening of risk spreads in the subprime crap check out Russ Winters' blog here.


p.s. if you're wondering how to protect yourself, you must be new here. in case you are the fourth reader of my blog, to save you some time in reading all my maniacal old posts, buy a little bit of gold to go with all that worthless paper you are saving for your "retirement". if you're really ballsy, buy a uranium miner's stock with resources in the ground in geo-politically secure area of the world

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