Monday, January 21, 2008

Short Memories Part 111

The theme of this series, is short memories. The reason I have harped on that is simply because those that haven't experienced something in their lifetime, or professional career, seldom expect the possibility to arise in the future. People that hadn't experienced a volcanic eruption,couldn't believe it when Mt. St. Helens blew up. Twenty years from now, nobody will even remember it, except historians, unless of course, it happens again.

The Savings & Loan disaster that occurred with the 1981-82 recession, was caused by prevailing savings/Certificates of deposit rates, going through the roof. When interest rates on real estate loans hit 24%, savings rates followed them up, just not as high. Compare this example to a grocer that buys a box of apples for $12, then retails it for $20. Same thing with money. Wholesale/retail. The greatest example that I am personally acquainted with is Washington Mutual, the largest Savings bank in the country. During the period from 1979 to about 1984, WaMu was paying out an average of around 14% on savings/certificates of deposit. Loans that they did not sell, and they took pride in not selling their loans on the secondary market, were earning anywhere from 4.5% to 6.5%, depending on how old the loans were, and what the prevailing rates were when they were closed. Paying out 14% while earning much less, put them upside down. Within Months they were broke. Fortunately, unlike other S & L's that bankrupt, Washington Mutual was a Mutual, meaning that they theoretically were owned by their depositors, much like a co-op. They were able, then, to reinvent themselves as a stock corporation, then selling stock to recapitalize. They still call themselves Washington Mutual, but they aren't.

Enter the current market. Overbuilt spec homes, banks competing with each other to snag the most loans, with the belief that good times are here to stay. Folks, nothing is here to stay. We have extreme energy prices. The largest real estate lender in the country, Countrywide, was in so much trouble, that Bank of America had to bail them out. Washington Mutual did it to themselves again, the same old way, with the same old mistakes.

Since around the 1970's, lenders stopped, for the most part, selling loans individually to FNMA and Freddie Mac, and began to bundle loans into multi-million dollar packages, which they then sold as securities on Wall street. They still do that. The purpose, was to spread the risk, by owning a small part of a large body of loans.With thousands of loans in trouble, panic is setting in. Causes:

The differences between then and now with regards to graduated payment ARM's, is that in the early 80's, interest rates were back down to 8 plus percent. The other, and more important difference, is that in the 80's, lenders weren't making loans to borrowers that weren't considered good risks. Competition between lenders, that were selling their loans like hotcakes, since values were climbing at great rates, (sound familiar?)and the sky was the limit. If the borrower didn't pay,there would be enough equity to resell the property at a profit, without loosing a dime.

Reality Check:

Interest rates have stayed too low, too long, causing the demand to dry up naturally. Low rates of interest also caused many buyers to step up, buying as much home as they could, while the good times last. Lenders, are eating sub-prime loans at an alarming rate, and values haven't continued to rise, but are falling precipitously. I predict that Wall Street is going to implode with drastic results in the investments market.


We are in the beginning of a recession that will probably last at least three and maybe more years. When the Republican administration proposes a cash rebate of $800 per family, to encourage purchasing, it is a dead on signal that consumer confidence is in the toilet. Home values, if the trend continues as I have described, will go as low as 50-65% of values in 2005, the peak of the market. Over thirty percent of the current North Idaho population is in some way, either directly or indirectly connected to the building trades. That number may be conservative. Turning loose 30% of our population is going to cause many businesses to go out of business, since the consumers have left for other areas and other fields of endeavor. Hunker down folks. You ain't seen nothin' yet.

Signed, Cassandra

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