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    THE PONZI SCHEME EQUITY VANISHES

     

    THE PONZI SCHEME EQUITY VANISHES

     

    “Homeowners were the victims of this PONZI SCHEME.” Back in 2007 when I said this, I was looked at as if I had four heads, eight eyes because everyone was still buying the, “subprime is contained” lie. Remember that?   The reality was and still is, this was a gigantic Ponzi scheme that was multi-level, complex and incestuous. I’ll cover your bad deals and you cover mine. You help me do a REPA 105 just when I have to file my quarterly report, and I’ll help you with cooking your books when yours is due.  I’ll lower my lending standards and you’ll lower yours to the point where all the loans are junk and no one will question any of us.  The only loans we will offer are adjustable rate exploding arms, and it doesn’t matter if a borrower tries to shop for a better rate, we are all pushing the same drugs.  We will all blacklist appraisers who refuse to inflate values.  We will all use MERS to track our junk loans. 

     

    Make no mistake, this was a classic market manipulation and Ponzi scheme. Look what happened as soon as the loose lending and impossible to inflate any further values came to an end- total collapse of the scheme.  What happened when the dance stopped and counterparties had to pay up- collapse of the financial markets.  Why? Because no one could pay.  They were all leveraged out to the moon and back.   

     

              So, what does that look like in real numbers.  Here’s a view of the collapse. About $7 trillion has been taken from the wealth account of property owners.   130 million housing units in the US – owners have lost an average of $54,000.

     

     

    NEGATIVE EQUITY – THE NEXT REALITY CHECK

     

    How many homeowners would be better off financially by walking away from their mortgage?

    Is housing affordable now? Or, do we still have a long way to fall back to affordable levels?

    SHOULD HOMEOWNERS JUST WALK AWAY? Payment performance on mortgages is terrible and getting worse. More than 4% of mortgages are in foreclosure. More than 13% of mortgages (ONE IN EIGHT) are behind.

     

    If supply equals demand, demand is nonexistent.

     

    WE ARE SIX FEET UNDER IN DEBT, FUNNY THOUGH NO ONE HAS PRONOUNCED US DEAD YET.
    This “Low Debt” and “High Debt” chart of approximately the last 60 years shows that the magnitude of debt, whether it be corporate or household, could be far beyond reasonable. If we are in the hang over of a world-record credit bubble, then the outlook for real estate investment is negative.

     

    The best research into credit bubbles says that property’s value will fall through the summer of 2012 — until three years from now. The good news is that the fall in values has nearly equaled the average fall of 35%. The bad news? What if we have a King-Kong credit bubble and it’s actually not stupid to say “It’s different this time.”?

     

    The graph shows half of all mortgages issued in 2006 have a balance greater than the value of the house securing the loan. What will happen to loan performance if 50% of all mortgages are worth more than their collateral?  Deutsche Bank issued a report in early August saying that 48% of all mortgages would be worth more than their collateral by 2011. 

     

     Property values could fall 60%!  Prices have already fallen 30%. When values fall according to the estimates in this graph, it is a certainty that banks and financial companies will fail en masse. A bandaid is all we’ve done so far. These banks need a tourniquet, heart surgery and years of rehab.   

     

    The Wall Street Journal recently reported that two-thirds of sales are a form of distressed sale (Improving Home Sales Belie Market Reality, 8/21/09). “‘Think about that for a minute,’ John Mauldin of Millennium Wave Advisors wrote this week. ‘Two-thirds of home sales are either foreclosures or banks taking a loss on the mortgage.’ And only a third of the remaining one-third — roughly 10% of overall sales — comes from ‘something we could call a normal selling process.’”

     

    NEW VS USED: A wide gap has opened up between sales of new homes and existing homes.

    The trend began in 2006 and remains elevated.

     

    As you can clearly see, WE ALL GOT SCREWED!

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