And Realtors Wept - Part II

As a follow-up to the previous post And Realtors Wept, the hits keep coming:

American Home Mortgage has offically declared bankruptcy today according to Bloomberg.

Where is that cushy mattress when you need it?

Economic Snapshot for June 2007

Dr. Christian Weller, Senior Fellow of the Center for American Progress and the Economic Policy Institute, certainly doesn't pull any punches when laying down the economic outlook from June 2007.

Jesus, are things really this bad? Here are some of Dr. Weller's sobering observations:

Wage growth is weak . Factoring in inflation, hourly wages were 2.3% higher and weekly wages were 1.5% higher in April 2007 than in March 2001.

Benefits are disappearing. The share of private sector workers with a pension dropped from 50.3% in 2000 to 45.0% in 2005, the last year for which data are available, and the share of people with employer-provided health insurance dropped from 63.6% to 59.5%.

Family debt is on the rise. In the first quarter of 2007, household
debt fell relative to disposable income for the first time in five years, but
still stayed at a comparatively high 130.7%, the third highest on record. In the fourth quarter of 2006, families spent 14.5% of their disposable income to service their debt—the largest share since 1980.

Families feel the pressure. The share of new mortgages entering
foreclosure was 0.5% in the fourth quarter of 2006, the highest level on record since 1979. The default rate on credit cards grew to 3.9% in the first quarter, an increase of 29.5% over the first quarter of 2006. And the personal bankruptcy rate, measured as bankruptcy cases relative to the U.S. population, grew by 51.5% from the first to the fourth quarter of 2006.

Housing market slows. New home sales increased in April 2007, spurred by an unprecedented decline in prices. The median price of new homes sold dropped by 11.1%, the largest one-month drop since the Census first recorded these data in 1963.

Gas prices rise sharply. In the first week of June, gasoline prices
averaged $3.15 per gallon. In inflation-adjusted terms, gasoline was at its highest level since June 1981 and it was 91.9% more expensive than in March 2001.

Savings plummet. The personal savings rate of -0.8% in the first
quarter of 2007 marked the eight quarter in a row with a negative personal savings rate.

Already weak job growth slows. Monthly job growth since March 2001 has averaged an annualized 0.6%. Over the past 12 months, the average monthly job growth was 160,400 jobs, compared to 213,400 in the preceding 12 months.

Poverty climbs. The poverty rate increased to 12.6% in 2005, the last year for which data are available, from 11.3% in 2000.

The government’s finances deteriorated. In 2001, the CBO anticipated that the government balance between 2002 and 2011 would be in the black to the tune of $5.6 trillion. Today, the CBO projects deficits between 2002 and 2011 of $2.9 trillion. This constitutes a deterioration for the period 2002 to 2011 of $8.5 trillion.

These deficits won’t shrink: Between 2007 and 2016, the CBO predicts cumulative deficits of $1.8 trillion. If AMT reform and permanent tax cuts for the wealthy are included, the total deficit for the next decade would come to $3.5 trillion—even if the costs for the wars in Iraq and Afghanistan drop below current projections in a few years.

This endangers our economic independence. Foreign investors bought 82% of new Treasury debt and the share of U.S. foreign-held debt grew to 46% from 32% from March 2001 to March 2007. The quarterly interest payments from the federal government to foreigners rose to $38 billion in the fourth quarter of 2006 from $21 billion in the first quarter of 2001.

Trade deficit remains high despite strong export growth. In the first quarter of 2006, the trade deficit rose slightly to 5.3% of gross domestic product from 5.2% in the fourth quarter of 2006. Yet these last trade deficits are still larger than any trade deficit since the Great Depression recorded before the third quarter of 2004.

Following last week's approval ratings for President George W. Bush (Only 19% of Americans consider the country to be "on the right track"? Are we sure he's taking pointers on economic policy from the Almighty?), these economic findings just add more fuel to the fire.

Read the full report here.

The Rancid Truth - Mortgage Lenders Make More Commissions By Screwing The Borrower

From California's North County Times:

California mortgage brokers, most of whom are licensed by the state Department of Real Estate, are legally obligated to act in the best interest of the borrower.
"However, there is no enforcement mechanism in place to ensure that they (do so)," said Paul Leonard, director for the California office of the Center for Responsible Lending. Leonard told a state banking commission earlier this year that mortgage brokers "have strong incentives to make abusive loans that harm consumers, and no one is stopping them."

A mortgage broker's incentive "is to close the loan while charging the highest combination of fees and mortgage interest rates the market will bear," a 2004 study prepared by Harvard University's Joint Center of Housing Studies concluded.

Brokers can earn higher commissions -- up to 3 percent instead of the typical 1 percent -- by having customers buy loans with interest rates that are higher than market rates, with prepayment penalties charged if the loan is paid off before a certain date, and with little or no verification of the borrower's income, known as "stated income" loans. That's the difference between a $12,000 and a $4,000 commission on a $400,000 loan.

But why will the home finance market bear high fees AND high mortgage interest rates? How can structuring loans that promote perpetual financial serfdom be acceptable to the borrower? How can reckless underwriting practices as well as tried and true "bait and switch" tactics be acceptable to loan consumers?

The answer is the 21st century financial retardation of the American consumer. Sure, one can certainly blame mortgage lenders and realtors for all of the hell breaking lose in real estate. It's almost too easy to do so - much in the same way one might blame ants for showing up at a picnic.

Compensation schemes like the ones described above might make one's blood boil, but the truth is that none of these incentives would ever be that attractive or effective, if the American consumers fueling the insanity weren't so incredibly illiterate when it comes to their own money.

We are approaching the middle of 2007 and millions of American home borrowers (not homeowners) are now paying the price with personal bankruptcy and home foreclosure - harsh lessons to learn that will likely affect their financial lives for years to come.

Housing Crash Leads to Tragedy in Orange County

For California realtors Joni and Kevin Park a "black cloud" of real estate worries and financial stress led them down a tragic path to self-destruction last week. After wielding a gun and threatening security officers at a high-end Laguna Beach resort, and later charging police officers on the scene, Joni and Kevin Park were shot dead by OC police while their children watched.

Now all that remains is an expensive room sevice bill, and a young family in grief asking themselves just how and why something like this could ever happen to their own parents.

Are more tragic stories like these likely to increase as the housing bubble bursts in 2007 and the Ponzi scheme comes crash down around us?