7 Million Foreclosures? Folks, this is huge and something will be done about it
Fed Has to See States on the Brink From Housing
By Jim Cramer
RealMoney.com Columnist
8/23/2007 2:51 PM EDT
Can we do without Florida, Arizona, California, Nevada and Michigan? Does it matter if we lose them? Do we care if the builders who dominate in those areas go under? Do we care if the homeowners who have home equity loans on top of regular loans who bought homes from 2005 become squatters?
These are the questions that you have to ask when you consider the Fed’s next move. You have to ask them because of the giant resets. We are in month one of a two-year cycle of resets that should drive 7 million homeowners out of their homes if the Fed doesn’t cut.
How do I get those projections? The spring selling season of 2005 is when our problems really began. That’s when 50% of the buyers started taking these mortgages that are so deadly, the ones with the teasers that often were soon after accompanied by home equity loans. These people bought homes in the spring and closed in June and their loans are resetting now, at astronomical rates.
You have to ask these harsh questions because the most recent filings of the major homebuilders show a dramatic decline in cash and a continuation of the building of new homes that is just killing us. You must ask these questions because the states I have mentioned could be crippled by these defaults.
These are the reasons that the Fed must ease. The Fed can pretend that it won’t matter. And I am not averse to every homebuilder going under; they were reckless lenders. But I can’t help think that the employment claims and the retail sales and the basic economy will be hurt badly by this domino chain that has just begun.
When I hear talking head after talking head say the fundamentals are sound in the country, they are saying that none of this stuff matters or that it won’t happen at all. I can’t buy that. I read too many 10-k’s and follow too many real estate situations for me to think that it won’t matter.
Oh, and if I hear one more rich person come on-air and say that these buyers all made the wrong choices, I am going the throw a brick at the TV. If there is a more innocent group than these people I can’t think of it:
- Alan Greenspan pushed these mortgages as a great way to buy a house.
- The mortgage companies didn’t help as they let a lot of loans out that they shouldn’t have because the investment banks would buy anything.
- Many people bought homes because it was the way the American dream has played out: it’s been a great way to build equity and to get a tax break.
- I hear ads constantly for home equity loans, they sound incredibly enticing and I can’t blame anyone who took them.
- The Fed raised rates 17 straight times for heaven’s sake so even if your house stayed the same price it would be a problem anyway.
These are the people we can’t help? Meanwhile, the homebuilders keep debasing the value of these homes with more building?
Now, understand that this is a relative issue. We set up Fannie MaeFNM - commentary - Cramer’s Take - Rating to help this situation, but the government has decided that’s not right anymore. We just subsidized the farmers who are rich as Croesus for no reason at all. We build everything in Iraq and a few months later the stuff seems to get blown up or torn down. - - - to help this situation, but the government has decided that’s not right anymore. We just subsidized the farmers who are rich as Croesus . We build everything in Iraq and a few months later the stuff seems to get blown up or torn down.Excuse me for caring about not-so-wealthy Americans.
Are things better than they were a week ago, before the Fed cut of the discount rate? No, not at all. We continue to deteriorate. Do I think that things will be better by year-end? Yes, if the Fed cuts and cuts but without it, things will really get ugly and we will lose all of those states. Lose them in a way that I think is unforgivable and just plain stupid because it doesn’t have to happen.
Random musings: I am not a big Bill Gross fan, but I think he is right about the need to get the Federal Housing Administration and Fannie Mae and the Federal Home Loan Banks moving, and about the need for a Resolution Trust — as he puts it in his September client letter, “an RMC — Reconstruction Mortgage Corporation” — for homeowners. He’s being a real statesman.
August 26th, 2007 at 4:24 am
The west coast is in big trouble. Thousands of households are affected by these subprime loans going into default. Who is at fault? The lenders who know that people will have this problem a few years down the road or the people who get in over their head and let their emotions get the best of them?
August 26th, 2007 at 3:09 pm
David, this seems to me to be the core question that regulators and judges will be dealing with for the next few years. Usually when I read a foreclosure story in the newspaper, there are other factors at work than just the mortgage payment. After all, most of the mortgages have not reset yet so borrowers are failing before the adjustment hits. Other factors include divorce, large monthly car expenses, borrowing to pay for a child’s college, unaffordable vacations were taken, etc. Look for those when you read the foreclosure stories.
It is sad that so many people may be displaced from their homes and this is why I think the government will step in to help the homeowner retain their house. There will be strong arguments for and against this so it will be interesting to watch. Thanks for commenting.