The turmoil in the economy caused by the subprime lending debacle is far from over. The stock markets may be somewhat stabilized temporarily by the intervention of European and Japanese central banks along with the U.S. Federal Reserve pumping in billions of dollars borrowed from the Chinese, but the overvalued real estate markets will most certainly take a tumble as a result of bad loans and a tighter fist in the banking industry as a whole. There is still a subprime lender shakeout to come as many are in deep trouble due to “lack of liquidity,” i.e., there are no buyers funneling cash through their complicated systems. To add to their problems, it was reported yesterday that the big banks have stopped institutional lending against subprime portfolios.
One result is that interest rates on many existing mortgages are rising to squeeze more cash out of what loans are out there already. The government might be racing in to help the corporate financial world with cash, but, as yet (and don’t hold your breath), there is no move to assist the millions of homeowners in trouble who will now get their pockets picked from both sides.
One area of concern is the so-called “jumbo loan.” These loans that are of the “non-conforming” variety account for 73 percent of mortgages in Santa Clara County this year. Simply put, these are loans of more than $417,000 and they have had a rate of around 6.6 percent. The rates for jumbos are now on the rise and it is predicted they will quickly find their way to around 8 percent. Many of these loans are of the higher risk, low or no down payment variety. The 1.4 percent rise on a loan with $500,000 remaining will mean higher payments of around $600 per month. That’s a lot of money to most families with this size of loan and may mean the difference between barely making ends meet and bankruptcy. It’s not hard to see that unless there is some plan for relief, it will certainly mean more foreclosures and worse.
Property values are beginning to fall all over the country, including here. The situation is very precarious. “Liquidity” or cash is drying up in an overextended credit market, and some economists see the possibility of panic selling in property and other markets where there are few buyers. Indeed, in real estate markets where only a few years ago it was common to see buyers offering tens of thousands of dollars in excess of asking prices, it is now the opposite.
We are in a scary situation in America. Our country’s future has been mortgaged to fight the Bush/Cheney Administration’s wars of choice and provide tax cuts to the rich. The international value of our currency, which has been steadily sinking over the last couple of years, is literally in the hands of the Chinese and other foreign countries that hold a vast amount of dollar reserves. As prices for imports (nearly everything consumers buy these days) rise because of our lower valued dollar and the value of real property drops, the American middle class homeowner is squeezed yet again, facing much higher costs for financial survival while equity in their home rapidly dwindles. Where it will end and whether there is even any solution to the problem is anybody’s guess. I have read everything from some economists’ dire predictions that include the possibility of the complete collapse of the U.S. Economy, to administration officials and Wall Street analysts saying this is just a “correction” in the markets and all is well.
Whatever the outcome nationally, the pressure will be especially felt here in our area where a large percentage of mortgages have values way up on the high end of the scale. The systemic knock-on effect can already be seen locally in the fact that real estate baron Carl Berg’s deal for the sale of his $1.8 billion portfolio of buildings in San Jose has fallen through because the corporate buyer’s financing has been withdrawn by the banks.
This is a loud wakeup call. Many seem to be sticking their heads in the sand and ignoring the situation in hope that it goes away. Shouldn’t we all be planning to face the worst case scenario so, just in case, we are prepared? What can we ordinary citizens do in the face of possible national and international economic upheaval?
If the bankers panic as the stock market has, we are in for a long bumpy ride.
Lenders need to realize that they do not need a large portfolio of foreclosed homes and start working with borrowers. Borrowers need to be realistic, as well and not bury their heads in the sand and hope for the best.
Many of the people who are in trouble had unrealistic hopes coupled with fraudulent loan generators, some of who need to go to jail.
#1 beat me to stating the obvious. Instead of knee-jerk Bush-bashing [yes, Jack, I know you can’t help it] blame the loan sharks and the people who were stupid enough to get in hock over their heads.
#2 HUGH
Very well put, short and to the point.
Mortgage crisis again proves ” Greed is not good ” although widely practiced by: few mortgage brokers, many home buyers without income or saving for home they purchased, most home flippers and speculators, and many sub market mortgage companies and banks
Greater fool theory only works when enough fools buy your overinflated home or stock with borrowed money
Silicon Valley motto should be “Greed is good ” as practiced by most of our well known highly praised “leaders” who practice stock options backdating, using stolen intellectual property used in startups, manipulating earnings and sales data to influence stock prices as advised by conflict of interest investment bankers, lawyers and CPA’s while many Silicon Valley workers are greater fools
#3 Napper, I agree.
As far back as 1998 (wasn’t a Democrat the president?) I applied for a loan at Wells, and the loan officer prepared papers that, had I signed them, would have been fraud! Greed, greed, greed! On the part of the lending industry, not so much on the poor schnook who wants to get a house!
The ones I feel sorry for are the businesses trying to get financed, for expansion, or inventory, or what ever and can’t find the credit.
Jerry
Jerry ,
A lot of dishonest people signed inflated financial papers made out by mortgage brokers, bankers and loan brokers when they knew information was incorrect so committed fraud to det lower rates so both borrower and mortgage person committed fraud and many mortgage reviewers want along with fraud or did not catch fraud
Yes lots greedy and dishonest loan brokers, home buyers and mortgage companies which ran Silicon Valley homes prices up ( supply vs demand with borrowed money ) making it worst – less affordable homes for everyone
Few did not know what they were signing – a very few
Dishonesty, greed and higher costs are now cost of business for credit cards, mortgages , workers compensation, uninsured motorists, insurance claims increasing cost of living and business for everyone
This following is an excerpt from Pierluigi Oliverio’s blog back in July. It gave me a chuckle then because it seemed naive as evidenced by our current economic meltdown.
“I believe that my experience in private industry keeps my brain sharp and ensures that I don’t lose touch with reality….
I realize the wheels of government do not move at the same speed as in the private sector, nor does government have the best track record of planning well or using money wisely. The survival skills in government do not exist like they do in the private sector since there is no risk of capital. I don’t want to lose focus of how important it is to plan ahead and use money as prudently as possible.”
Corporate and individual greed is the common denominator in this mess. Forsaking a decent profit for a huge profit, jobs have been outsourced to other countries, and we are quickly selling our country to China. I hope the leaders in our same government that Pierluigi describes as not having the survival skills which exist in the private sector have the fortitude to do something quickly so we do not become a third tier country.
After seeing numerous articles about leverage in the Wall St Journal, Marketwatch, etc. earlier this year, and taking note of the inverted yield curve (which almost always indicates a recession), I have been warning friends and family of our third quarter recession.
Wait until Christmas. This is going to be a terrible year for retailers.
The best thing people can do *now* is to try to save some extra money, pay down high interest / variable rate debt, and maybe take a side job to make a little money before the employment market (and consumer spending) are curtailed.
Jack, a very insightful post.
I recall the “Dot .Com Dot .Gon” era.
Denial was rampant. Many even now are shaking the sand out of their ears after that fiasco!
So what have we learned from our Chinese Partners in Global Supply Enconomy?
Who are the architechs of this new and growing extravaganza.
Show me a city or provence that still has it’s copper, steel, or any valuable scrap, in storage, and I will be totally amazed.
The Chinese have been buying up scrap rubber, metals, paints, any thing we do not want in our life style. Tree-lumber from all over the world is being devoured at an alaming rate to feed the Chinese factory that supplies our every whim.
This whole senerio is mind boggling, in terms of conciqensous.
If Mattle can produce millions of leaded toys that will ultimately reduce the brain developmental stages of a child at 6 months to 6 years, to where there is so much damage that we raise a whole nation of degererated mentally developed brains, in a 20 year span, all of the brain power will have to be imported from some where else, China,perhaps?
How many of us have purchased an item at Orchard Supply for a buck 99 and marveled at how anybody could manufacture this item, package it, ship it to this country and place it on the shelf for us to buy?
Wecome to the darkside! We may have already become a nation of addicts for the cheap stuff.
We have been distracted by the “evil terrorists” so well played by those that would want us to place all of our money into a security based economy.
What is the answer? Include a new friend into your every day life style. Change the world by changing your selves, dailey. Suport the farmers that are producing illigaly harvested produce in Salinas ,san Juaquin Valley and any thing grown on this land of ours. You will know when eating your next salads and entre! Illigal salad is safe and good.
The alturnative could be poisoned pet food,tainted pork products.
God knows what else! Perhaps we can change the world one self at a time.
Gil Hernandez
Here is a link to another great article today on the consequences of U.S. companies offshoring manufacturing jobs to China by Paul Craig Roberts, an old school conservative economist who was second in command at the U.S. Treasury during the Reagan Administration.
http://www.counterpunch.com/roberts08172007.html
Jack,
The article by Paul Craig Roberts is very ominous. Our country needs to wake up before it is too late. If many of our major corporations don’t give a damn if we are selling away our best jobs and assets to the rest of the world so they can sell us toxic products, then perhaps it is time for governmental regulations be imposed. How many of these same corporations then turn around and slash pensions and benefits to their employees crying their profits aren’t big enough, pointing their fingers at the employees? Governmental regulations and unions don’t seem to be too popular in our current society, but perhaps they are necessary in light of our current crisis.
Jack,
Could you post this information for your readers and let other bloggers know of this upcoming event? – Thanks, Rick Helin.
There will be a formal Memorial Service for Jim Arbuckle who passed away on July 7th of this year (this story already covered so beautifully by local newspapers). The service is scheduled for Thursday October 4th beginning at 5:00 PM at San Jose History Park on Senter Road. The Memorial of his Life is being co-sponsored by History San Jose, The California Pioneers of Santa Clara County, The Ancient and Honorable Order of E Clampus Vitus Mountain Charlie Chapter No. 1850, Preservation Action Council of San Jose and his many lifelong friends and associates who knew and loved Jim so well.