Capitol Hill Blue Forums Political Issues Finance, the economy & Economics How will the financial crisis develop?

While I agree that the stock market does not show the health of the economy as a whole, you'd be amazed at how little it misses. Stock prices of every company are traded on a bid/ask system and readily available information is incorporated into the stock prices with amazing speed. I forget where I read this number but information about the economy as a whole as well as company specific news for the S&P 500 companies is incorporated within the price in less than 10 seconds of the news hitting the public. Now, the public is not prevy to all information about a company as soon as it is available to 'insiders' of a company thus there are restrictions on the kind of trading an 'insider' can do.

While you might think that the price of a stock like Apple might not have anything to do with the economy as a whole, like food prices or natural resources prices (oil) or employment you'll be amazed at how much it does reflect those issues as well. While a change in oil is not going to affect that stock as much as GM, it wills till feel an affect. Investors are aware that if the prices of raw materials will eventually be passed onto the consumer, thus less money is available for luxury items and people will buy less of Apple's products and services.

Some stocks move in direct correlation with the market, some are affected more than the market while some are inverse to the market.

Since the world economy is no longer on the 'gold standard' the world economy 'works' on the belief that the major world currencies and economies are 'fail-proof' (you can debate that but that is the underlying belief otherwise sane people would no longer invest in it). A 'sane person' in economic terms is a person that will only invest if the expected return is higher than the cost (the person can be legally insane otherwise )

I can't think of anything I disagree with that you wrote, Kap. The only quibble I might have is that the "public" information is not generally available to all the investors, only to those with the inclination to follow the market (whichever market segment they might be invested in). So, to that extent it works. In the grander scheme, though, it is still based upon expectations, which is the fundamental flaw in the system. Even worse, though, the market in general is being influenced by big investors chasing short-term returns - this is the sloshing I was referring to earlier. The worst offenders are the investment banks, like Bear Stearns, that bid up offerings hoping to capitalize on the upswing, but when they pull out (or crash), that segment of the market is sucked into the vortex created. That is what happened with the CDOs created with sub-prime mortgage paper, and that influence created a huge instability in the overall stock market. It happens on a regular basis as money people get creative with finances, and program investors chase returns. It comes, in my view, from ignoring the production economy in favor of the investor economy. When they are out of sync - watch out!

Thanks, but I am actually quite aware of how homebuyer's bond programs work, Kap17.

Rick was not referring to investors buying bonds, he was referring to a program directed at encourging first-time homebuyers, not investors, to purchase homes. Key phrase is "purchase homes".:-)
Yours,
Issodhos

Actually, I wrote:

By "investors" I mean people who buy homes to rent out as income property. Right now the market is ripe for investors because those losing their homes now need somewhere to rent as first-time buyers have already soaked up much of the housing market leaving primarily investors left to buy.

What ever happened to the policy of sticking to the topic of a thread?
_________

I apologize for that. But hey, at least I helped Rick from having his loan fall through.

Anyway, back on topic. The credit crunch is about to be extended when the 'liar loans' will start showing the same level of default as the sub-prime loans.

'Liar loans' threaten to prolong mortgage mess


When I used to review this loans for a brief period of time in 2005 and 2006 I was amazed at how underwriters approved people working at Walmart and saying they made 6k a month. But those were the rules back then. You can say anything you want and you'll get approved.

"WalMart" "6K a month"! That's a good one!!

In a way, I don't think we drifted far from the topic. Although the particulars of Rick's particular loan may not be important (to the thread, I know they are to him), they are a pretty good exemplar of "how the crisis will develop." It starts when people feel that they will not be held accountable for their actions. And I use the term "people" deliberately. There are lots of players who are looking to avoid responsibility - the loan officers, the loan seekers, the packagers, the investors, etc. - by creating bad paper and passing it around, they were essentially playing "hot potato" with them, hoping that when they defaulted they would not be the ones holding them. Now, as the market shrinks back from the gross misconduct entailed, everyone is tightening back up, restricting the ability of even qualified borrowers to find reasonable loan terms. It could, eventually, settle out, but it is another example of why "markets" should not police themselves - because they don't. There isn't any real incentive to do so.

That's how my Realtor describes loans being doled out in 2005 & 2006. When I pre-qual'd for the IndyMac Bank loan in June 2008, the loan officer admitted to me that he used handle loans without income verification - but now he couldn't do it.

So who was it that allowed loans without income verification - the CEOs of these companies? Somebody at each of these companies allowed this to happen - those folks should be the ones held responsible.

Techincally there is nothing illegal about these kind of loans, nor the PayOption loans nor the NegativeAmortization loans. The laws concerning mortgage indursty state that the terms of the loan must be fully disclosed to the borrower which in most cases they were.

Of course there are a few loans out there where people we're shoved into without fully disclosing the terms but isn't the borrower's duty to read what they are signing? I know that the note or Deed of Trust might look like a strange language to someone not familiar with it but if you don't know, then ask someone.

However, individuals wanted to move from the 250k house and get into the 450k home without having their income increase to support that. The lenders were more than willing to do their part to get them into them thinking that even if the borrowers wouldn't pay the monthly then they would take the house and not lose that much money. The more 'exotic' loans had loan to value caps around 80-90%.

However, there were lenders that specialized in ALT-A and subprime loans that gave loans to anyone and then sold those loans to investors through mortgage backed securities.

The majority of loans originated during those years, 2002-2006 are performing loans. The high deliquency rates and foreclosure are found in the subprime and the ALT-A loans (the stated income or no income no asset loans).

For example, when Indymac failed, the number of non-performing loans was at 8%. Because independent mortgage lenders are highly leveraged, even that kind of default rate will cause a failure.

Thankfully, since Countrywide was purchased by Bank of America and Indymac went down under (2 biggest independed mortgage lenders) there are not that many left that could have that much of an impact. The next one to watch is Washington Mutual... now that is a bank that is not too big to fail and their exposure to the west coast mortgage industry is very high.