Six Phases of The Housing
Bubble
Mike "Mish" Shedlock
Jul 13, 2007
The popping of the housing
bubble is much like the six phases of the typical project.
1. Enthusiasm
2. Disillusionment
3. Panic
4. Search for the guilty
5. Punishment of the innocent
6. Praise and honors for the non-participants
Right now we seem to be in
an overlapping state centered around panic (this phase can last
a long time) with lingering pockets of disillusionment
and the beginnings of the search for the guilty now underway.
As anecdotal evidence as to
where we are in the cycle I point to Foreclosure
crisis sparks investigation.
"Amid Wisconsin's deepening
mortgage foreclosure crisis, Legal Aid Society of Milwaukee on
Tuesday announced an inquiry into what went wrong.
"We need to find out who
are the people being foreclosed, who are their servicers and
original lenders, and what kinds of loans did they get,"
said Catey Doyle, the organization's chief staff attorney. "There
are a lot of questions about who bears responsibility for this
situation, (and) the only way to find out who the players are
is to manually go through court files."
Volunteers working under the
group's supervision recently launched a review of all Milwaukee
County Circuit Court cases filed since June 2006, Doyle said.
She said the group will report its findings this fall by lender,
zip code, loan type and other factors.
"Loans made in the last
year got progressively more and more outrageous," Doyle
said. "It was like a feeding frenzy. Now we're seeing 20
foreclosures a day on average in Milwaukee County, and sometimes
30. It's really depressing."
All year, her office has been
awash in complaints of deceptive lending practices - "dozens
of them," Doyle said.
As part of the Search for the
Guilty phase, there is an ongoing denial and coverup by some
of those who are guilty but are trying very hard to stop any
fingers from pointing in their direction. This One
on One with David Wyss, Chief Economist of S&P shows
what I mean.
"SUSIE GHARIB: More analysis
now on that sub-prime credit watch by Standard & Poor's.
Joining us, David Wyss, chief economist of S&P. Hi, David.
DAVID WYSS, CHIEF ECONOMIST,
STANDARD & POOR'S: Good evening.
GHARIB: Let's begin by getting
your reasons of why S&P put these mortgage- backed securities
on negative credit watch.
WYSS: Well, the basic reasoning
is they're simply not performing as well as we expected. The
housing market is not turning around in a hurry. We didn't really
expect it to. Home prices still have a ways to drop. And we're
already seeing substantially higher default rates on these securities
than we had anticipated at this point. So it was time to move
them.
GHARIB: But why now? All of
these factors that you've mentioned have been going on in the
housing sector has been struggling for some time, why now?
WYSS: Well, largely because
we need to get enough record on these securities to see how they're
performing. We knew the housing sector was underperforming. We
knew that when we rated these securities. But what surprised
us is that even given the poor performance for the housing sector,
the default rates are running higher than we would have expected
given the FICO scores here, given the loan-to-value ratios in
these mortgages.
GHARIB: Now I understand that
there are 612 mortgage securities on your credit watch list.
And you're reviewing them and some of them will be downgraded.
How many of them will be downgraded do you think?
WYSS: Well, if we knew that
we wouldn't have to put them on credit watch. But I would say,
you know, the great majority. My personal guess would be at least
90 percent. Let's keep this in perspective. We're looking at
$12 billion. That sounds like a lot of money -- it is a lot of
money to most of us. It's only 2 percent of the sub-prime securities
we rated during that period. And it's 0.01 percent of the U.S.
mortgage market.
GHARIB: All right. So if it's
2 percent, then how serious is this announcement that you made
today? How worried should investors be?
WYSS: I don't think you should
be worried generally, but obviously what we do worry about, is
there a concentration of this risk that has built up in some
of the hedge funds, for example, that could cause problems.
David Wyss is trying like mad
(as are numerous others in the state of denial) to contain the
damage by containing the negative sentiment. It's galling to
see shills saying with straight face the problem is only with
2% of subprime when a full 65% of the bonds in indexes that track
subprime mortgage debt don't meet the S&P ratings criteria
that were in place when they were sold.
The 2.1% downgrade of debt
by the S&P is a joke. I talked about this at length in Stress
Test. The ploy by David Wyss at the S&P is doomed to
fail. Sorry David, no matter how hard you try, you can't put
air back into a popped bubble.
Jul 13, 2007
Mike Shedlock / Mish
email: Mish
http://globaleconomicanalysis.blogspot.com/
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