Another one bites the dust

Hmm, how's that housing bubble doin'?

Yeppers, another home loan vendor bites the dust. But unlike the others, this one wasn't a sub-prime lender. This one is an "alt-A" lender, someone who lends money to folks who have good credit but maybe are buying a little more house than they can afford or something like that. The failures are moving up the home loan lending food chain.

So what does it mean to you? Well, that's still unclear. You can bet that housing prices are going to be down. The assets of these lenders are being picked up by vultures for peanuts. The vultures take the proceeds of the performing loans, but the non-performing loans go into foreclosure. Where the mortgage lender was willing to work with homeowners in hopes that either a) housing prices would rise enough to make it worth foreclosing at some point in the future, b) the homeowner would somehow start paying his loan on time, or c) cows would fly, the vulture is going to foreclose and sell the house at auction to the lowest bidder and write off the loss. That's why he paid only pennies on the dollar for the portfolio of the failed lender, after all -- so that he could wring a few pennies more out of the deal. If it was a $500K loan and he sells the house for $200K after repo expenses, but he only paid $150K for the loan, he's still ahead. But other folks in the neighborhood with $500K houses suddenly just had the values of their homes reduced to $300K, and are underwater on their loans now, and can't get the promised re-fi to deal with their ARM that's about to re-adjust to 13.5% interest after 5 years because their house is no longer worth enough to re-finance the loan with... so the troubles spread.

The eventual result, if too many of these lenders fail, is galloping deflation similar to that in the period 1929-1932. Now, galloping deflation is great for millionaires. It means their millions are worth more (in real terms) because their millions will buy more. It's horrible for working people who have a bit of debt, because they can't sell their services in the open market for enough to service that debt, and end up with all their possessions repossessed by (duh) the wealthy. The period 1929-1932 was probably the greatest transfer of real wealth (land and goods) from working people to the wealthy in the history of the nation, because that's what deflation does -- it transfers wealth from people who owe money (generally working people) to people with lots of money in the bank (generally the wealthy).

So the next question is, "will the U.S. government bail out the lenders?" In a word... no. The only outfits that the U.S. government is going to bail out is going to be Fannie Mae and Freddie Mac, who are too big to allow to fail. If individual mortgage lenders fail, that's disappearing dollars from the economy (since those assets are suddenly worth only 20% of what they were once worth), but given that the Federal Reserve has been cranking out dollars with all the avid fervor of a Weimar Republic finance ministry over the past six years in order to finance the horrible federal balance of payments imbalance, it could be said that what the Fed giveth, the Fed now taketh away. But if Fannie and Freddie go under, the government will have to step in and guarantee those mortgage-backed bonds because if those disappear, then we are truly in the deflationary death spiral because too much money will vaporize out of the economy. The problem is that the U.S. government itself is not exactly in a fiscal situation where it is flush with dough. What that means is that the printing presses will have to be cranked up even more. Now, the printing presses actually have been cranking for a while now to finance the current federal balance of payments deficit (thus why food and fuel have been going up in price -- too many dollars from those presses cranking away chasing too little food and fuel), but if we go the Weimar Republic route we'll all be hauling bales and wheelbarrows full of cash out of the bank every day to buy a loaf of bread and a gallon of gas.

So what's going to happen? Fuck, you're asking a penguin what's going to happen? I haven't the foggiest clue what's going to happen. Galloping deflation (good for rich, bad for working people) is one possibility. Galloping inflation is unlikely -- hurts the rich, y'know, and this regime is all about helping the rich. Lots of working folks losing everything they own to sharks... well duh. This is the Bush Administration, bay-bee! You can bet that whatever happens, Vice President Halliburton will protect his own. Ah gher-uhn-TEEE! (With all due respect to the late Justin Wilson). In the meantime, if you're thinking of buying a house, I recommend doing it only if the payments (minus the interest and property tax deductions) will be the same or lower than what you're paying as rent. Because housing prices are only going one way for the next few years, and that is down, D-O-W-N, bay-bee!

-- Badtux the Economics Penguin