Cheap Credit Caused the Crunch

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Consumers and Investors can measure the current economic problems by counting the number of times they hear the term “credit crunch.”

We are being told that it is very difficult to get a big mortgage, that deals are falling through, that innocent home buyers are in a sorry state.  A big bank has raised its rate on jumbo mortgages from 6.8% to 8.0%.  Lenders are demanding documentation of borrowers’ income and assets.  What’s next?  A 10% down payment?  Mortgage insurance?

For several years now, people have been buying homes, no-money-down, on the supposition that high prices would go higher.  Some folks even bought several homes, planning to sell the extra ones when prices went higher.  Now the age-old question is heard:  “Sell to whom?”

This is the market that Bear Stearns’ (a major investment company on Wall Street) chief financial officer calls the worst he’s seen in 22 years.  This time period spans all the other credit and stock market disasters in recent history – and here they are:

  • the market meltdown of 1987
  • the savings and loan collapse of 1989
  • the Gulf War market of 1991
  • the Orange County bankruptcy of 1994
  • the Asian Contagion of 1998
  • the demise of Long-Term Capital Management of 1998
  • the post Sept. 11 market of 2001
  • and , the Enron-Tyco-WorldCom accounting scandals of 2001-2002

 Good Luck!

Freeze Your Credit

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Identity theft is one of the fastest growing financial crimes.

Nearly 10 million Americans fall victim each year. The Identity Theft Resource Center reported in 2005, on average, an ID theft victim of new account and other fraud spent 60 hours resolving problems brought on by ID theft, those victims of existing accounts spent an average of 15 hours resolving problems. A 2003 Federal Trade Commission study found that identity theft also costs U.S. businesses nearly $48 billion annually, and consumers an additional $5 billion per year.

A security freeze lets consumers stop thieves from getting credit in their names.

A security freeze locks, or freezes, access to the consumer credit report and credit score. Without this information, a business will not issue new credit to a thief. When the consumer wants to get new credit, he or she uses a PIN to unlock access to the credit file. These states give consumers this important weapon to prevent identity theft:

Consumers Union’s Guide to State Security Freeze Laws Continue reading

Buy Gold – GLD

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streetTRACKS® Gold Shares

Objective Designed to track the price of gold (net of Trust expenses)

Structure Continuously offered investment trust

Symbol GLD

Exchange New York Stock Exchange Continue reading

Fed will print Money!

A Little Economic History

Why the Fed has no other Alternative but to print Money!

The entire economic expansion of the US in the 19th century was a deflationary boom. Declining prices led to strong real income gains. As time went by, workers could buy with their incomes a larger and larger basket of goods because prices for consumer goods and commodities declined.

I other words, whereas inflation is the equivalent of a loss of purchasing power of money, in deflationary times the purchasing power of money increases. In deflation my 100 dollars today are worth more in a year’s time since they will buy a larger basket of goods and assets, whose prices are declining. In my opinion, there is, therefore, nothing wrong about deflation. So why is the US Fed so concerned about deflation that Mr. Bernanke even suggested dropping US dollar bills from a helicopter in order to combat it?

There is one condition under which deflation is a disaster and this is when total credit market debt is high as a percentage of the economy.carrying_alot_of_debt_md_wht.gif

When debts are as large as there are now, deflating prices and especially deflating asset prices would wreck havoc in the economic system and lead to massive defaults and bankruptcies. I may add that, as can be seen from,between 1950 and 1980 the debt to GDP remained largely constant.

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But after 1980, and in particular after Mr. Greenspan became Fed chairman
in 1987, debt to GDP exploded. Therefore, it is not deflation that is the
problem, but the preceding debt inflation for which the Fed’s expansionary
monetary policies are fully responsible. So, having created a monetary and
debt monster, the Fed embarked starting 2001 in a huge money printing
operation in order to avoid deflation.

Rio Tinto Offer for Alcan

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Rio Tinto (LSE: RIO)(ASX: RIO)(NYSE: RTP) has received US antitrust clearance for the proposed acquisition of Alcan by a subsidiary of Rio Tinto.

Receipt of this, and other regulatory clearances, is a condition to Rio Tinto’s offer to acquire the outstanding shares in Alcan.

About Rio Tinto

Rio Tinto is a leading international mining group headquartered in the UK, combining Rio Tinto plc, a London listed company, and Rio Tinto Limited, which is listed on the Australian Securities Exchange.

Rio Tinto’s business is finding, mining, and processing mineral resources. Major products are aluminium, copper, diamonds, energy (coal and uranium), gold, industrial minerals (borax, titanium dioxide, salt, talc) and iron ore. Activities span the world but are strongly represented in Australia and North America with significant businesses in South America, Asia, Europe and southern Africa. Continue reading

Glut of homes hits 16-year high

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Sales slip but supply of homes on the market jumps to 9.6 months, pushing prices down for 12th straight month.

By Chris Isidore, CNNMoney.com senior writer


NEW YORK (CNNMoney.com) — Homeowners trying to sell last month faced the biggest glut of homes on the market in about 16 years, as declining sales and growing problems in the mortgage market helped push home prices down for the 12th straight month.

The National Association of Realtors said sales by homeowners slipped to an annual rate of 5.75 million last month, down 0.2 percent from the revised 5.76 million pace in June. Economists surveyed by Briefing.com had forecast the sales rate would fall to 5.7 million in the latest reading.

Not only did sales slip but the number of homes for sale jumped 5.1 percent, the group said, meaning there is now a 9.6-month supply of homes for sale, up from 9.1-months in the June reading. It was the biggest supply of homes by that measure since October 1991.

Foreclosure rescue scams

“Forget ‘location, location, location.’ The most important factor in today’s real estate market is ‘supply, supply, supply,'” said Mike Larson, a real estate analyst at with independent research firm Weiss Research.

“We are literally swimming in an ocean of homes for sale. In fact, at 4.59 million units, we have the most raw inventory for sale in history,” he said. “Until we work through this extremely large inventory glut, we’re not going to see any momentum in home prices.”

Even the Realtors’ own economist admitted that problems in the mortgage market will continue to take a toll on home sales.

“Home sales probably would be rising in the absence of the mortgage liquidity issues of the past two months,” said Lawrence Yun, the trade group’s senior economist.

A $200,000 ‘loss’ — and happy with it

“Some buyers with contracts have been scrambling when loan commitments did not materialize at the last moment, while other potential buyers are simply waiting for the mortgage market to stabilize.”

August has seen problems in the mortgage market cut deeply into the availability of financing for many buyers, particularly those needing subprime mortgages due to credit rating issues or a jumbo mortgage of more than $417,000.

The existing home sale numbers track sales that closed in the month. Closings typically occur a month or two after buyers lock in financing.

“These are ‘PC’ figures — pre-crunch,” said Larson. “The mortgage credit crunch that began very late in July and picked up steam in August will likely put more downward pressure on home sales and prices this month and into the fall.”

Add curb appeal to sell your home in down market

The report comes after Friday’s government reading that showed new homes selling at a better-than-expected pace. But the reports showed more weakness in prices – which have become a major concern for the U.S. economy as a whole.

The median price of an existing home sold in the month fell 0.6 percent from a year earlier to $228,900. It marked the 12th straight month that prices have been down on that basis, after the June reading was revised lower as well. The July 2006 median price was a record high for that reading, which measures the point at which half the homes sold go for more and half go for less.

Experts have tied weak auto sales at least partly to concerns among consumers about the decline in equity in their homes. Some fear that weakness in home values and reduced access to home equity lines of credit could soon affect a broader range of retail sales.

In addition, the downturn in housing has also fed investor concern about mortgage-backed securities, which in turn has created a credit crunch in financial markets, and sent stocks into a tailspin, as a number of corporate deals have run into financing problems.

Where the growth is – and isn’t

Not surprisingly, results at the nation’s home builders have been among the hardest hit.

While luxury home builder Toll Brothers (Charts, Fortune 500) managed to report a narrow profit last week that topped forecasts of a loss, it still saw earnings fall 85 percent from year-earlier levels. And the six publicly traded builders who are larger than Toll have all reported losses recently.

Lennar (Charts, Fortune 500), the nation’s No. 1 builder, and No. 5 KB Home (Charts, Fortune 500) both reported a loss in the latest quarter. No. 2 home builder D.R. Horton (Charts, Fortune 500) and No. 3 Centex (Charts, Fortune 500) both reported losses far bigger than Wall Street had expected, while No. 6 Pulte Homes (Charts, Fortune 500) and Hovnanian Enterprises (Charts, Fortune 500) have reported losses for the last two quarters and analysts project losses for at least the next year. Top of page

Debt Notes

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By Alan Abelson

08-27-07

There are over $1 Trillion of securitized low-grade mortgages outstanding and nearly three-quarters of a trillion dollars worth of mortgages whose adjustable rates are slated to rise over the next year, a heap of them sooner rather than later.  That alone assures an appreciably larger magnitude of pain in the months ahead.

Moreover, as Merrill Lynch’s David Rosenberg astutely reminds us, there’s something like $300 billion in debt sitting on the banks’ balance sheets pledged to fund the last gasp of the M&A boom, commitments made when junk bonds were priced much more attractively.

And we still can look forward, biting our lips as we do, to the doleful impact of hedge funds dumping assets to meet what could easily prove a mighty rush of redemptions.

Debt Rattle

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Debt Rattle

By Alan Abelson

08-27-07

CRISES OF ANY KIND INEVITABLY BRING out the best and the worst in people.  They inspire the too few voices of reason as well as the predictable strident expressions of hysteria.  And especially intriguing perhaps are the unexpected revelations they offer.  The current credit crisis, still fermenting and gathering toxicity, is plainly no exception.
 
The cries of the dispossessed — and the multitudes about to be — resound pitiably throughout the land. What for so many years had been a roaring seller’s housing market is with breathtaking rapidity turning into a buyer’s dream.
 
The climate for borrowers has turned inhospitably chilly and downright frigid for wannabe homeowners.  No mystery why.  As the trusty data collectors at Federal Deposit Insurance Corp. observe in their latest communique, delinquent loans grew by a monster $6.4 Billion in the second quarter of this year, paced by – what else? – overdue mortgage payments, a leap of 10%, the greatest quarterly increase since the final three months of 1990, when, as you may remember, the listing economy was mired in recession.  Actual foreclosures, by RealtyTrac’s count, are a startling 93% higher than a year ago.

Today’s Bankruptcy Law helps the Banks

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The New Bankruptcy Law is protecting Banks and Lenders more than the Consumers.

CONGRESS REVISED THE nation’s bankruptcy laws under 2005’s Bankruptcy Abuse Prevention and Consumer Protection Act, effectively making it harder for individuals to claim insolvency. The reform was seen by critics as protecting banks and lenders more than the consumers the legislation’s title claimed to help. Now, as the fallout from the subprime mess continues to expand, an uptick in bankruptcy filings may yet be another kink in the growing mortgage crisis.

Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys, has long thought the revised law to be too restrictive. Now, Sommer says, it needs to be revamped again to better reflect the current mortgage market. (The original bankruptcy law dates back to 1978, when exotic mortgages were less common and foreclosure was rarely a reason to file for bankruptcy.)

Even with the toughened rules, personal bankruptcy filings for the first six months of 2007 are up 48.3% compared with the same period last year. As of June 30, 391,105 individuals filed for bankruptcy this year, up from 263,660 a year earlier, according to the American Bankruptcy Institute.

Once-confident homeowners who, during the real-estate boom, bought homes using adjustable-rate, interest-only, no-money-down mortgages are now overwhelmed by a weaker house values and crushing debts. Indeed, foreclosure filings reported in July jumped 93% from July 2006, and 9% from June.

Still, bankruptcy filings are well below pre-2005 levels. Sommer says the higher costs and increased paperwork of the new law make it too onerous for consumers to file. Ultimately, he says, that makes it harder for those facing foreclosure to use personal bankruptcy to protect their homes while they figure out how to meet ballooning mortgage payments.

“One of the nice things about bankruptcy until 2005 was that it was a pretty inexpensive proceeding,” says Sommer, who also serves as the supervising attorney of the Consumer Bankruptcy Assistance Project in Philadelphia. “Most places would have it done for under $1,000. Some places have gone up 50% to 100%. That’s a real big barrier.” Besides lowering costs, another part of his proposal involves stripping down the mortgage to the home’s current value and re-amortizing that over 30 years.

Here’s what else Sommer had to say about the bankruptcy code’s problems and his ideas to help borrowers facing foreclosure hold on to their homes.

SmartMoney.com: Why do you think the number of bankruptcy filings is higher so far this year than last year?

Henry Sommer: The number of bankruptcy filings has gone up steadily. They went way down right when the law went into effect [in 2005] — primarily because people rushed to file beforehand. Since then, it’s only at 70% of levels before…. It has been steadily going up. Certainly, people having problems with their mortgages is one reason why they’re filing.

SM: How do you propose to change the bankruptcy law?

HS: There are a couple of different types of changes we propose. One is to make filing for bankruptcy less complicated. One of the side effects of the new law — and I’d like to think Congress didn’t intend this — is the phenomenal increase in paperwork and cost associated with filing, and it’s therefore denying access to people who can’t afford them. So one type of change we’d like to see is a cutback on the paperwork and the expense of bankruptcy. The other is that bankruptcy laws be changed to give people more tools to deal with foreclosures, including these exploding adjustable rate mortgages (ARMs) you see now, where payments just go so high because of the interest rate adjustments. So we propose changes to make bankruptcy more useful.

SM: What’s an example of that?

HS: Typically, when people face a foreclosure, bankruptcy has allowed them to take up to five years to catch up on their arrearages. In a Chapter 13 case, [usually you would] start paying your monthly mortgage payment of, say, $1,000. You [pay] arrearages over 12 months…. Bankruptcy allows you to do that. That’s worked well for people who had a temporary income interruption that caused them to fall behind on payments. [Our proposal] gives three, four or five years to catch up, instead of typically two months…. The two months, or slightly longer, is how long mortgage companies will usually give debtors to catch up outside of bankruptcy.

That doesn’t work so well when your monthly payment has been bumped up because of an adjustable rate mortgage. That’s the problem suddenly facing a lot of people. It doesn’t work if you can’t even afford the monthly payment. Our proposal is to take the ARMs and re-amortize them over 30 years as a fixed rate. They’d do that as part of Chapter 13 bankruptcy. [This would apply] if your house was overappraised or it’s fallen in value. Say you got a 100% mortgage for your $200,000 house, and now it’s worth $170,000. You re-amortize it over 30 years and pay off the mortgage that way. That’s the crux of our proposal — strip down the mortgage to the current value of the house and re-amortize that over 30 years. We’re hoping that will be introduced in Congress in September.

SM: Is that considered at least a partial loan forgiveness?

HS: No, definitely not. It’s been done for years with cars. In 1978 [when the law was first established] we didn’t have these kinds of mortgages either. Even if it made sense in 1978, it doesn’t make sense now.

We’re not trying to repeal the 2005 law wholesale, but we’re trying to get rid of the excess paperwork and deal with the particular mortgage problem, which really wasn’t addressed in the 2005 revisions. One of the nice things about bankruptcy until 2005 was that it was a pretty inexpensive proceeding. Most places would have it done for under $1,000. Some places have gone up 50% to 100%. That’s a real big barrier.

SM: How much paperwork are we talking about?

HS: The paperwork is roughly doubled. Among other things, debtors must provide tax returns, 60 days’ worth of pay stubs, bank statements and complete a six-page “means testing” form. All of these are new requirements, along with the requirement of obtaining credit counseling before bankruptcy and a credit education course during the case. On top of this, the United States Trustee’s office, part of the Justice Department, often demands numerous additional documents, like six months’ worth of pay stubs, two years of tax returns, all credit card statements.

SM: Steve Bartlett, president and chief executive of Financial Services Roundtable, an organization that represents financial-services companies, in May testified in Congress that the new bankruptcy reform law is working well as evidenced by the big decrease in filings since it was enacted.

HS: I disagree with him. He’s employed by banks and other creditors. He bases that on the fact that the number of bankruptcy filings are down. He said the number of bankruptcies was down something like 40%…. But what about all the people who want to file but can’t? People aren’t filing because it’s much more difficult. It’s something of a misperception out there that you can’t file for bankruptcy anymore.

SM: Why do people think that?

HS: There was kind of a superficial publicity when the new law went into effect. Many were told that by debt collectors, which of course makes the debt collectors’ job easier. That’s another reason why that [notion] will slowly go away — when people know of others who have file for bankruptcy.

One of the things mortgage companies say is that they’ll do a loan modification, they’ll reduce the principal. But it’s extremely hard to get those. A lot of people are led down the path thinking they’ll get them and the next day they’re facing foreclosure. So what the companies claim to be doing and what they’re actually doing are two different things.

SM: What would you advise at-risk consumers do?

HS: People have tendencies to put their heads in the sand and wait for a solution to come. But the sooner they deal with it, the better…. If people think they’re going to have a problem, it’s a good time to figure out what their options are.

Top Savings Deposit Yields

barrons-08-27-07.gifTop Savings Deposit Yields from Barrons Magazine dated 08-27-07

Money Market Accounts

          Institution                      Phone Number         Yield      

  1. Indymac Bank               877-202-5088          5.75
  2. WT Direct                     800-983-4732          5.26
  3. E-Loan.com                  888-533-5333          5.25
  4. Countrywide Bank         800-844-1091          5.25
  5. Transportation Allia      800-837-4214          5.25

Six-Month CDs

          Institution                      Phone Number         Yield      

  1. Countrywide Bank         800-844-1091          5.50
  2. UmbrellaBank.com       866-862-7355          5.42
  3. Corus Bank                  800-555-5710         5.40
  4. First Trade Union Sa    800-242-0272         5.25
  5. Indymac Bank              877-202-5088          5.25

One-Year CDs

          Institution                      Phone Number         Yield      

  1. Countrywide Bank         800-844-1091          5.65
  2. Indymac Bank              877-202-5088          5.25
  3. First Metropolitan        800-435-4040         5.43
  4. Corus Bank                  800-555-5710         5.42
  5. Fireside Bank               877-326-4167          5.38

Five-Year CDs

         Institution                      Phone Number         Yield      

  1. E-Loan.com                 888-533-5333          5.55
  2. Fireside Bank               877-326-4167          5.50
  3. Intervest Ntl Bank      212-218-8383            5.50
  4. First Comm Bank         614-239-4680          5.45
  5. First Metropolitan        800-435-4040         5.38

 Rates are the highest yields offered by federally-insured banks and savings associations nationwide.

Phone verify rates and yields before investing or sending money.

Ask if calculated interest is compunded daily, monthly, quarterly, semiannually or annually.  And for God’s sakes learn the difference.