When 2008 rolls around and the U.S. economy is sinking with frightening momentum into a bottomless quagmire, you’ll be glad you read this entry. Why? Because you anticipated every step of the implosion and warned your friends who were still floating complacently down that river in Egypt (de-nial).

In keeping with our theme of context, let’s begin by noting that the proper context for the housing bubble is the all-encompassing global credit bubble which has inflated every asset class. With this fundamental firmly in mind, let’s follow Deep Throat’s advice from the classic film All the President’s Men and "Follow the money."

Let’s first dispense with "the real estate market". Yes, supply and demand and housing starts and zillow.com and neighborhood sales and all the other market stuff play a part in the coming implosion, but all that noise is more a sideshow than the Main Event. Why? Follow the money. The main event is the credit market, because if you can’t borrow money, or can only borrow it at a premium and under tight conditions, then how many houses are for sale in your neighborhood or the median price paid, etc. shrink to near-meaningless. Real estate sales and valuations depend solely on credit. Everything else is secondary.

Next, let’s dispense with the notion that the implosion of housing-based lending can be "quarantined" and won’t affect the economy. The reason is that mortgage-backed securities, and the CDOs and other derivatives which have been piled in untold trillions onto them, are one leg of an increasingly wobbly three-leg stool. The second leg is so-called "junk bonds" and other commercial paper (which has ballooned to astounding levels–see chart), and the third is government bonds in all their flavors. Once the MBS leg snaps, the entire debt stool collapses.

Read more…

 

---

 

 

 

Only a low credit score stood between Alipio Estruch and a mortgage to buy a $449,000 Spanish-style house in Weston, Fla., a few miles west of Fort Lauderdale.

Instead of spending several years repairing his credit rating, which he said was marred by two forgotten cell phone bills and identity theft, the 37-year-old real estate agent paid $1,800 to an Internet-based company to bump up his score almost overnight.

The result was a happy ending for Estruch, but the growing practice is sending shivers through the mortgage industry. Federal regulators are also reviewing the practice. And after being contacted by The Associated Press for this story, Fair Isaac Corp., the developer of the widely used FICO score, said it will change its credit scoring system beginning later this year in a way it contends will end this little-known but potentially high-impact mortgage loan loophole.

Read more…

 

---

 

LOS ANGELES (Reuters) - On September 15, 2004, the clock was ticking on Lelon DeWitt’s life and his subprime loan.

When the transmission repairman underwent open-heart surgery, he told his mortgage broker he didn’t want a housing loan that was in the works.

"I didn’t know if I was going to be dead or alive," DeWitt later recounted.

But the mortgage broker, Troy Musick of Wholesale Mortgage Co., was so eager to clinch the deal, he followed the couple into the hospital, said DeWitt’s wife, Ruth DeWitt.

As a surgeon cracked Mr. DeWitt’s chest open for a quadruple heart bypass, the broker approached her in the waiting room of Elkhart General Hospital in Elkhart, Indiana.

"It’s now or never," she remembers him saying.

Read more….

---