"This process once it is recognized, is clearly evident, and especially so after the fact. So also,

Companies quality inn plaza orlando like New Century initiate mortgages and then resell them to other investors, quality inn plaza orlando often with promises to repurchase the loans. New Century had quadrupled its loan originations over the last three years producing $56 billion in new loans in 2005:
But that's all over now. The company announced last week that it has stopped making loans, and reported Monday that it may be asked to repurchase $8.4 billion of the loans it had originally sold, which would force it into bankruptcy.
I share Arnold Kling's concern that one of the most troubling aspects of this story is the apparent contribution quality inn plaza orlando of fraud. The Wall Street Journal reported that in December, borrowers failed to make even the first payment on 2.5% of New Century's loans.
Others will follow, and there will be two implications for the housing quality inn plaza orlando market. First, as loans are no longer extended to potential quality inn plaza orlando homebuyers with higher quality inn plaza orlando credit risk, that will reduce the demand quality inn plaza orlando for new and existing homes. Calculated Risk (your one-stop-shop for all housing news) notes the estimate from Dale Westhoff, Bear Stearns' head of mortgage-backed research, that tighter lending standards could mean 1.1 million fewer home buyers. Second, as some of the previously issued weak mortgages go into default, the homes will come back on the market under foreclosure resale, further depressing the market. Again from CR , rising mortgage defaults by subprime quality inn plaza orlando borrowers quality inn plaza orlando may mean an additional 500,000 homes for sale, according to CreditSights Inc.
James, I hate (but have to) ask this question: quality inn plaza orlando what were you thinking back a few months ago, calling for "soft landing" in housing? This whole subprime mess was so obvious, it was only a question of time before the sticky substance was going to hit the ventilating appliance. You sincerely didn't realize THIS was going to happen?
In his classic, Manias, quality inn plaza orlando Panics, and Crashes, Charles Kindleberger noted the tendency for frauds and swindles to emerge during the manic phase of the cycle. My all-time favorite quality inn plaza orlando has long been the stock that was offered for sale during the British South Sea Bubble of 1720 for "an undertaking which shall in due time be revealed." It had takers, but the undertaking never was revealed...
The party is over for housing. The tightening of credit standards will lead to a huge leg down in housing prices which will lead the subprime fallout to spread to all other parts of the market. This will lead to credit defaults in other segments of the economy and further tightening of lending quality inn plaza orlando standards. quality inn plaza orlando Consumer spending will be seriously crushed and personal bankruptcies will rise exponentially. Very few economists are even ready to accept the possibility of a recession period let alone the possibility of a VERY SEVERE recession or DEPRESSION that could result from this lending collapse.
So who become the losers in the sub-prime quality inn plaza orlando melt down? The subprime borrowers probably put down a few thousand dollars in loan fees for a home they will occupy for less than a year which will wipe out whatever nest egg they once had. And New Century shareholders, obviously. quality inn plaza orlando But who else? Freddie and Fannie? Mutual fund buyers of mortgage backed securities? The government? Who's going to end up eating the billions in losses?
"Led by HSBC Holdings PLC, banks and others are trying to force small mortgage lenders to buy back some of the same loans the banks eagerly bought in 2005 and 2006, by enforcing what the industry calls repurchase agreements. Squeezed by the onslaught of defaults, many originators are saying they can't afford to buy back their loans or are pursuing bankruptcy protection."
When the health of the system rides on the back of what some in the industry call "leafblower loans" (half-million to million dollar loans made to folks who earn their livings walking up and down driveways with leafblowers strapped quality inn plaza orlando to their backs) one should not be caught looking the wrong way at the inflection point.
I too am curious about your view of current events given your aversion to bubble explanations. I can't see any other explanation for the last few years of lending and borrowing other than people making decisions which only made sense under the assumption that housing prices would always continue to go up, which is pretty much the definition of a bubble.
"The more obvious features of the speculative episode are manifestly clear to anyone open to understanding. Some artifact quality inn plaza orlando or some development, seemingly new and desirable -- tulips in Holland, gold in Louisiana, real estate in Florida, the superb economic designs of Ronald Reagan -- captures the financial quality inn plaza orlando mind or perhaps, more accurately, what so passes. The price of the object of speculation goes up. Securities, land, objets d'art, and other property, when bought today, are worth more tomorrow. This increase and the prospect attract new buyers; the new buyers assure a further increase. Yet more are attracted; yet more buy; the increase continues. The speculation building on itself provides its own momentum.
"This process once it is recognized, is clearly evident, and especially so after the fact. So also, if more subjectively, are the basic attitudes of the participants. These take two forms. There are those who are persuaded that some new price-enhancing circumstance is in control, and they expect quality inn plaza orlando the market to stay up and go up, perhaps indefinitely. It is adjusting to a new situation, a new world of greatly, even infinitely increasing returns and resulting values. Then there are those, superficially more astute and generally fewer in number, who perceive or believe themselves to perceive the speculative mood of the moment. They are in to ride the upward wave; their particular genius, they are convinced, will allow them to get out before the speculation runs its course. They will get the maximum quality inn plaza orlando reward from the increase as it continues; they will be out before the eventual fall.
"For built into this situation is the eventual and inevitable quality inn plaza orlando fall. Built in also is the circumstance that it cannot come gently or gradually. When it comes, it bears the grim face of disaster. That is because both of the groups of participans in the speculative situation are programmed for sudden efforts at escape. Something, it matter little what -- although it will always be much debated -- triggers the ultimate reversal. Those who had been riding the upward wave decide now is the time to get out. Those who thought the increase would be forever find their illusion destroyed abruptly, and they, also, respond to the newly revealed reality by selling or trying to sell. Thus the collapse. And thus the rule, supported by the experience of centuries: the speculative episode always ends not with a whimper but with a bang. Here will be occcasion to see this rule frequently repeated."
Alex, I do not know that I have used the expression "soft landing" to describe the current or prospective outlook quality inn plaza orlando for housing. I have used the expression "soft landing" several times to describe 1994-95, and on October 3 to refer to a scenario of slow but positive real GDP growth. But in that post, what I said in particular about housing was "the housing slowdown is significant, real, and upon us now, but this is as bad as it's going to get".
As for why I thought the number of new home sales would not deteriorate further from the autumn levels, I saw high interest rates as the primary cause of the housing downturn and the drop in interest rates since last July as a favorable quality inn plaza orlando fundamental.
It is certainly true that I have become more pessimistic about both GDP and housing over the last month. Part of that is because I'm seeing more indications that the slowdown has spread beyond housing, and, to the extent that happens, it's a big negative for housing as well. Part of my growing pessimism is the acknowledgement that any stimulus from last summer's drop in mortgage rates has worn off by now. And part of my growing pessimism comes from the recognition that I did indeed underestimate the nature of mortgage problem, quality inn plaza orlando as I will be discussing quality inn plaza orlando further in future posts.
JDH wrote a famous paper arguing that one cannot econometrically identify a fundamental in a price time series, ergo, one cannot identify a bubble. This is known as the "misspecified bubble" problem.
However, there is an asset for which one can do so: closed-end funds. For these there is an underlying asset value that tends to differ from the fund's value. Most funds have values somewhat below their underlying asset values because quality inn plaza orlando of tax and management costs. But if such a fund develops a premium, especially one that rises sharply, then one really is observing an honest-to-gosh, econometrically specifiable bubble. We have seen quite a few of these over time.
"Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. . . . With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. . . .
Where once more-marginal applicants quality inn plaza orlando would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual quality inn plaza orlando applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending . . . fostering constructive innovation that is both responsive to market demand and beneficial quality inn plaza orlando to consumers." (emphasis added)
The largest debt listed by New Century, owed to Morgan Stanley, was $2.5 billion. New Century said that after Citigroup Inc. demanded additional collateral of $80.3 million to cover a "margin deficit" on some of the company's debt last Tuesday, Goldman Sachs Group Inc. filed a default notice on Wednesday, seeking repayment quality inn plaza orlando of roughly $100 million. In a filing yesterday, New Century also listed outstanding debts of about $900 million to Credit quality inn plaza orlando Suisse Group Inc., $800 million to IXIS Real Estate Capital Inc. and $600 million to Bank of America Corp.
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