Wednesday, March 15, 2006

Our Worst Nightmare: The Puncture of the Current U.S. Housing Bubble

Complete article found Here.


TORONTO (PreciousMetalsWarrants) -- The key to holding up the entire speculative U.S. financial system with its current excessive levels of debt - federal (current account and trade), state, municipal, corporate and household - is maintaining the U.S. housing bubble. Anything less would result in America’s worst nightmare and, in short order, the entire world.

The housing market is dominated by Fannie Mae and Freddie Mac who hold 75% of all outstanding home mortgages (and the Federal Home Loan Bank Board to a much lesser extent). One too many additional increases in the Fed rate may well turn out to be the U.S. economy's Achilles' heel and lead to a major crisis at these two institutions generating an out-of-control systemic breakdown situation and disastrous financial implosion...

Here's why. Fannie’s and Freddie's (FF) original functions were to provide liquidity to the housing market. After a mortgage lending institution (MLI) originated a mortgage – say, $100,000 – FF would purchase that mortgage from the MLI for a fee and hold the mortgage to maturity. The MLI now had $100,000 to make yet another mortgage loan and earn yet another fee. By the repeating of this process FF injected liquidity into the housing market making it possible for MLIs to increase the number of mortgage loans they could make each year and earn considerably more fees in the process...

...The above-mentioned obligations of FF total over $5 trillion. Another $1 trillion in obligations are held by the Federal Home Loan Bank Board and private issuers of MBS. These $6 trillion in risky obligations are distinct from, and in addition to, the more than $6 trillion in mortgages themselves. As such, a total in excess of $12 trillion is laden on to the homes and attached to to the incomes of America's homeowners. And then there is credit card debt, car lease debt, cell phone contract debt, bank loan debts, margin debt, etc!...

...FF assets have expanded so rapidly over the past few years due to the number of mortgages, the escalating value of mortgages (as a result of escalating real estate prices) and the refinancing of mortgages and they have so much debt in the form of mortgages, bonds, MBS’s and derivatives that should they encounter any problems servicing the debt it most likely will have a destabilizing effect on the U.S. economy.

Indeed, the Fed are so concerned about this happening they are flooding the economy with almost limitless liquidity. There must be a crisis of historic proportions coming, and the Federal Reserve Bank of the United States is making sure that there is enough liquidity in place to protect our nation's fragile financial system. The amazing thing is that the Fed's actions mean they know what is about to happen.

The complete article is a must-read for anyone interested in understanding how the morgage industry, lead by Fannie Mae and Freddie Mac, has contributed to the wobbly house o' cards built on ARMs, No interest morgages, and other speculative loans to marginal buyers that will walk away from their obligations in a heartbeat as interest rates continue to rise as the economy continues to tank. The article's only deficit is not addresing the aspects of speculation and overbuilding that are compounding the problem by flooding the market with excess capacity that will contribute dramatically to the coming crash. - Etienne