People with a few clues and a few grudges against all things Bush seem to be delighting in telling us how bad things are out here in California and how that augers ill for the economy. The keyword of disaster is foreclosure.
I've been seeing ads on telephone poles for many months that promise 100,000 cash on seconds for something like 400 bucks a month. That sounds very tasty, and in fact I have been restraining myself from asking Pops to put up his house so I could have that kind of cash for less than the price of my Beemer note. Alas when I called the 800 number on that telephone pole ad, nobody answered. So I put the notion out of my head. Something fishy is going on.
And yet the advertisements on the AM radio persist, and while I think that the Mortgage Minute Guy is above board, there has been a lot of fakery going on. It's easy to get lost in the fine print and it's in almost nobody's best interest to decipher all that for the average Joe. Still, you don't have to be a rocket scientist to understand 'buyer beware'.
The California real-estate marked defies description and common sense. That's because there are some of the richest people in the world here, and some of the nation's poorest. The house that I grew up in was purchased in 1966 for about 30,000. The payment, which went to a mortgage company called Lomas & Nettleton, was $177. That house today would sell for something like half a million dollars. That makes absolutely no sense whatsoever, except in California. I had a chance to buy it for 180K back in 1989, but I wouldn't touch it with a ten foot pole. In retrospect, I can say that was a financial mistake. On the other hand I know somebody was murdered on that block that year. I rented on the beach instead.
When the king of subprimes, New Century went under a couple months ago, we started looking at the problem seriously. At the time, subprime was about 20% of the market and the default rate was about 13%. The last figures I saw was that they are now about 18% of the market and the default rate is up to about 18%. Even though this is a small part of the overall mortgage market, there are evidently a goodly amount of mortgage backed derivative securities that are at risk and this is hurting the big boys. Over at Tigerhawk, they are saying that the health of all lenders may be in question, but it's too early to tell if this is a big deal that requires tweaking from the Fed or something we can get through without a heavy hand.
So the crisis isn't about foreclosure itself, but my inclination to
say that foreclosures are a blip may be premature. I know the craziness
in California and so take stories about foreclosures in Northern Cal
(having lived through the Dot Com Boom) with a grain of salt. There's
more to it than that. It is the cascading effect that foreclosures have
on big lenders that should concern us.