 Gold
& Mortgage Failure Avalanche
Jim Willie
CB
Jim Willie CB is the editor of the "Hat Trick
Letter"
Dec 13, 2007
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Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics
with the US Economy and US Federal Reserve monetary policy.
An avalanche comes in 2008.
Its wreckage will hit both the USEconomy and banking world. The
greatest deception in the bank sector this year has been the
misrepresentation of the mortgage debacle as a subprime problem.
That is akin to calling an iceberg only a problem for what one
can see, when 90% of its mass lies below water. Ice is lighter
than water. Most mortgage bonds are like acidic stones weighing
down bank and investor balance sheets. Wall Street and the USGovt
con artists, using tools are fraud and distortion, prefer the
public and investment community to think of the 'Subprime Problem'
as the source of distress. On mortgage bonds, collateralized
debt obligation derivatives, structured investment vehicles,
all dominant in the news, reports constantly stress how the problem
is traced to subprime mortgages to all those unworthy home loan
borrowers who never should have been given such loans, even at
higher mortgage rates. The systemic threat, both to the US banking
system and USEconomy, has entered a new stage. The remedy addressed
is sure to force the USDollar lower and the gold price higher,
to occur in the next gear. Breakouts are coming which will seem
to lose control, like what was seen in September and October.
OF DESPERATION & FIRE TRUCKS
Official policy in
reaction to the USEconomic threat of recession will spill money
into every corner and crevice. Gold and mining stocks will benefit.
My forecast stated all summer long is that the USGovt maestros
will gradually introduce increasingly broader rescue elements,
since everything they try at early stages will fail. The USFed
remains badly behind the curve, as yesterday they cut the official
Fed Funds target rate, but did not sufficiently cut the Discount
Window rate that imposes a Stigma Tax. Today, the USFed announced
a much broader bank liquidity policy, focused upon more auctions
at set rates and a swap line with the Euro Central Bank. They
have announced more coordination with the Bank of England, the
Bank of Canada, the Swiss National Bank, and the US Federal Reserve.
This is part of my forecast. They must have been working all
night long.
By summertime 2008, the requirements
for a grandiose Resolution Trust platform will be etched more
clearly. The key to the gold price lies in two spots: 1) massive
monetary inflation to treat the banking problems and prevent
recession, 2) realized price inflation in a manner lacking disguise.
John Mauldin uses the metaphor of fire trucks being called to
the scene. The USFed has been amazingly shamefully slow in recognizing
the problems. Stuck in their stupid "inflation versus growth"
framework mindset, they miss both the interbank system seizures
and home mortgage avalanche coming outside the prime mortgage
corral.
The threat to the banking system
will be staggering. The threat to the economic system will be
broad and deep. The avalanche will expose the combined system
as insolvent, broken, in need to total rescue. The damage will
necessitate rescue platforms to undermine the entire US$-based
monetary system, certainly sufficient to lift gold well past
the $1000 level. By the time 2009 approaches, the system will
be recognized as totally broken. The new question will be whether
that system can indeed be repaired. As measures put in place
and debated for consensus approval, the urgently demanded movement
should be the particulars on the new Resolution Trust Corporation.
The desperation no longer hidden (like on Bernanke's face)
will lift gold well past the $1000 mark. The impetus behind the
gold price will turn to inflation much more than the US$ counter-lever.
All major currencies will be inflating heavily, as seen in recent
central bank decisions either to cut official interest rates
or to hold steady. Major currencies will begin to be compared
in a manner to judge which ones are weaker as they are undermined
during stimulus to discourage economic recession and credit flow
interruptions.
The new 2008 year will smash
that notion, as an absolute avalanche of failed mortgages will
slam the bank system and financial sector in general, the majority
being prime mortgages. SHOCK & AWE IS RIGHT AROUND THE CORNER
ON PRIME MORTGAGES, A FACT THE BANKERS ARE KEENLY AWARE OF!!!
The villainous failed mortgages have a few traits in common.
These primes are adjustable rate mortgages (ARMs) with harsh
resets. They contain destructive features certain to cause as
much pain as laughter for their insanity. Recall they are prime
mortgages with lax features resembling subprime loans without
the higher rates. A reaction to the incredibly flimsy inadequate
Subprime Mortgage Freeze Plan, with dire descriptions of the
prime mortgage avalanche can be found in the December special
report to the Hat Trick Letter, entitled "National Bailout
& Looming Mortgage Disaster."
Only 150 to 225 thousand subprime
mortgages will be addressed by this flimsy HOPE NOW freeze plan,
and nothing among the looming prime mortgages heading for certain
default. The innovative mortgage products face ruin. Large cross
sections of newer mortgages, written since year 2000, are under-water
badly. Their loan balances are much greater than their home values.
THE NEW PHENOMENON IN 2008 IS RECOGNITION OF ZOMBIE LOANS, ZOMBIE
HOMEOWNERS, ZOMBIE CONSUMERS, AND ZOMBIE BANKS. They are bankrupt
without declaration; they are walking dead. An added footnote
is needed to this auxiliary HTL special report, tied to accusations
of fraud by large mortgage bond investors, both in the United
States and foreign institutions.
MOTIVE: AVOID LAWSUITS & FORCED
BOND BUYBACKS
The threat of court-ordered
forced contractual bond buyback by Wall Street con artists is
nearing a reality. If investors engage the Wall Street banker
broker dealers in the renegotiation, refinances, and workouts,
then those institutional investors will lose the right to sue
Wall Street firms, and lose the opportunity to force fraudulent
bonds to be bought back at perhaps ten times their current traded
prices. Wall Street, given its Fascist Business Model connection
with the USGovt, has enlisted Congressional help to place 'Safe
Harbor' obstructions to lawsuits, thus absolving the criminal
activities perpetrated by Wall Street. The gaggle of Wall Street
firms engaged in packaging mortgage bonds, ensuring they contained
a 'AAA' false label, colluding with key agencies to misrepresent
the sale of securities, has made a bold move to freeze troubled
mortgages, and to dupe/lure investors into the process. If they
take the bait, they lose the opportunity for remedy on hundreds
of billion$ in fraud-ridden bond losses. My contention made for
over two years is that the USGovt and Dept Treasury and Wall
Street and numerous major icons in the United States embody institutionalized
dishonesty. That perception is much more clear in 2007. Legal
address and remedy of that institutionalized dishonesty might
come in 2008.
Wall Street and other major
bankers continue to soil their pants. They realize several looming
tragedies:
- Prime 'AAA' mortgage bonds
have lost roughly 20% of value
- Innovative flexible adjustable
mortgages are due to default in droves
- Enormous growing list of under-water
mortgages are beyond rescue
- Big banks are facing dire
insolvency threats, as new defaults approach
- Enormous bond writedowns have
only begun for big banks
- Insolvency can turn to bankruptcy
with more debt rating agency downgrades
- Mortgage bond investors contemplate
lawsuits, accusing Wall Street fraud
- Wall Street banks face the
prospect of over $1 trillion in mortgage bond buybacks
- Rescue & remedy will trash
the USDollar and catapult the gold price
As a preface, one should know
that politicians did not advance this plan. The key initiators
of the HOPE NOW project were three banks. It was an alliance
led by the Federal Deposit Insurance Corp (insurer of banks),
along with big banks and their lobbyists from Citigroup, JPMorgan,
and Wells Fargo. These banks in my opinion are insolvent,
soon to be forced into bankruptcy as the next round of the mortgage
debacle unfolds from the 'innovative' adjustable and option laden
mortgages. They all face bankruptcy, insured by the FDIC. If
lawsuits are filed and that road is traveled, declared bankruptcy
is assured. The rescues to save the Ruling Elite will lift gold
and trash the USDollar, as much from a new unprecedented round
of monetary inflation, as from destroyed image of the US financial
system. Freezes never work. When in college, my memory is vivid
of the lunatic Nixon Wage Price Freeze. When it lifted, the price
inflation rampage was the worst in modern history. My suspicion
is that when any mortgage freeze is lifted, both mortgage rates
will rise sharply and mortgage bonds will fall sharply in value.
Few have bothered to think
about the infectious disease of moral hazard, to consumer and
household reactions. Many economic participants will feel left
out with the current rescue, against a backdrop of watching colossal
fraud go unpunished. They will possibly act destructively, an
intentional effort to destroy their credit rating so they can
participate in national bailouts. Many live in homes with negative
home equity. They might feel above the rules, immune to impact
of their actions, engrained in destructive habits, feel powerful
from a reprieve, want to be included, or just not care. They
will feel they have nothing to lose. The likelihood that property
taxes will be paid, water & sewer fees paid, lawns mowed,
hedges & trees pruned, garbage removed, broken windows repaired,
holes in walls filled, driveway cracks filled, shingles straightened,
liens on the property resolved, these are all in doubt in my
book. Pride in ownership will turn ugly, into a free ride game.
Practicalities are strained to the extreme. A zombie comes to
learn to act with disregard, disrespect, and disobedience. Henry
David Thoreau wrote 'Civil Disobedience' almost
two centuries ago in response to the Spanish Civil War, yet another
false flag self-inflicted attack. That was done to the USS Maine
vessel off the Cuban coastline. Expect such disobedience to be
practiced widely in reaction.
NOT A SUBPRIME PROBLEM ANYMORE
If 'AAA' rated mortgage
bonds have lost 20% already, this is not a subprime problem anymore.
My contention is that many 'AAA' bonds are likely to lose over
50% of their value, as home collateral value drops another 10%.
Wells Fargo announced a whopping $1.2 billion loss from prime
second mortgages recently. Remember how people could borrow
their entire down payment with an immediate 20% second mortgage
out of the gate? Well, they are failing, with Moodys estimating
15% of them to fail. That is on par with the horrendous subprime
default rate. The E*Trade bond loss writedowns were not subprime.
After taxes and cash infusion is removed from Citadel Investments,
the E*Trade fire sale salvaged only 11 cents per dollar on their
$3.1 billion prime mortgage bond portfolio. The
liquidation damaged the entire market by exposing its low value.
This is not a subprime mortgage problem anymore. The debt ratings
agencies writedowns have entered a second gear, with some acceleration.
They are not only downgrading massive bank portfolios, they
are threatening to downgrade the bond insurers such as ACA Capital
and MBIA, as well as others. What is a house or business
worth when it cannot be insured due to faulty structures? NOT
MUCH!!!
FASCIST BUSINESS MODEL ENTRENCHED
However, here is where
the real damage comes, as an extension of the Fascist Business
Model.
The sickest and often most fraud-ridden banking entities will
receive fresh new money, possible USGovt handout infusions. The
failures will be rewarded, leaving the successful, honest, competent
to struggle or to go begging. Banks will issue fewer prime mortgages.
The plan will force extreme focus on subprimes, ignoring primes.
Banks will be forced to hold back on funding new loans since
old loans must be addressed. In the process, their plan will
very possibly accelerate the downside for housing prices. Home
inventory levels will continue to rise. Sellers will not find
willing buyers so easily capable to make final their loans. The
lending institutions in general will be rendered less inefficient.
The most glaring example of this principle will be the capital
funding of Freddie Mac and Fannie Mae. F&F are failed
institutions with broken apparatuses, having operated for years
without disclosure, but will dominate the national program if
our current leaders have their way. Instead, new financial
entities should be created, not revival of broken entities. Inefficient
capital usage will be the main feature of this plan.
In my opinion, THE FINANCIAL SYSTEM HAS OFFICIALLY ENTERED CHAOS,
with that chaos more widely recognized in year 2008. To be sure,
it is an early stage. Massive housing losses have occurred. Even
more massive mortgage bond and related credit derivative losses
will occur. Rewards are being prepared for the most reckless
of participants. Encouraged destruction of credit and credit
ratings is possibly around the corner, so that marginal households
can participate in freezes, bailouts, or whatever is handed out.
Subprime loan failures are the tip of the iceberg. In 2008,
the breakdown of numerous other types of mortgages will occur,
already in their initial phase. They are NOT subprime mortgages.
The mortgage finance sequence of boom, bubble, bust is entering
the third stage. Prices for housing properties will revert at
least to where they were in 2001 when the insanity began, which
was actively encouraged by Greenspan. History tells us that.
His fingerprints are everywhere. All subprime mortgage bonds
will go to zero in value. All CDO bonds containing subprimes
will go to zero in value. All prime mortgage bonds will lose
at least half their value. If the national decline in home prices
falls over 10% to 15% more, then almost all recently issued prime
mortgage bonds might possibly head to zero in value. Few talk
about the next destructive factor for mortgage bonds.
Ultimately, a minimum of
a $2 trillion bailout is necessary, as mortgage bond losses will
be at least that high, especially when considering the leveraged
CDO bond losses. The
new bigger broader Resolution Trust Corporation must be created
as soon as possible without delay. Urgency is here and now. The
system is in the process of degradation, sure to lead to some
increased disorder. The changes will be similar in England and
possibly to some degree Spain, because they went overboard on
real estate speculation. England built an economic dependence
upon an inflated housing sector. Spain permitted uncontrollable
vacation property speculation. Be sure to know that Wall Street
firms are in charge of the solution to a disaster that they themselves
perpetrated. Wall Street firms will want to be in charge of the
bailouts, even the Resolution Trust Corp. Wall Street firms will
want to be involved in the grotesque bailouts, since so much
corruption and opportunity will be presented. Like the parasites
they are, they sense gain. Think Halliburton and the Iraq &
Afghan Wars, with profits abounding to insiders on cozy contracts.
Think contractors in New Orleans and Hurricane Katrina relief.
Think the next RTC administrators, with more huge profits. To
even consider the fraud-ridden Freddie Mac and Fannie Mae for
serving as the foundation financial agency for secondary market
reinvigoration is a travesty. It is a blatant endorsement
of the entrenched Fascist Business Model.
FAILED INNOVATION IN MORTGAGES
Anyone who believes
the mortgage debacle is limited to subprime loans and bonds has
bought hookline & sinker the story trumpeted by Wall Street
and the larger banking community. The risk pricing model has
broken, with authorities determined not to have the story properly.
Instead, it is framed in friendly terminology, distorted to the
public and the investment community. The world of bizarre
reckless adjustable rate mortgages (ARM) is soon to suffer a
publicly visible and horrible implosion. The aftermath of irresponsible
0% down payment mortgages is soon to suffer implosion. The innovative
creative flexible mortgages are soon to suffer implosion. No
documentation, no income mortgages, unimaginable in normal cultures,
are soon to suffer implosion. A vast world of under-water mortgages
exists in the United States, soon to suffer implosion. The abuse
of second mortgages and home equity loans is soon to suffer implosion.
The main focus of attention will be on California, the center
of innovation and creativity. Think the American Home Dream turning
to a Ball & Chain toward serfdom, the New American Nightmare.
Many details are provided in the Hat Trick Letter Special Report.
The key theme with innovative
adjustable mortgages is their zombie nature. Resale is hindered,
as is refinance, since the property is vastly under-water, loan
balance greatly exceeding the home value. A return to similar
mortgage loans is impossible, since they no longer exist. A loan
rate freeze is a certified prescription for another zombie loan
and zombie home title owner. Particular gratitude goes to ScottM
in Seattle and that anonymous San Francisco mortgage broker who
offered details after his personal experience in approving over
$2 billion in mortgage loans himself. His information is appreciated,
and needs to be made more public.
Negative amortization mortgage
implosion. This type loan has permitted home title owners to
pay less than the appropriate interest amount, thus adding to
the loan balance. When the loans hit their maximum negative
potential allowance, a huge increase is forced which could result
in required monthly payments not 20% to 35% higher, but 100%
to 200% higher. The full interest requirement kicks in, based
upon the full loan balance, having risen. Imagine a $1400 monthly
payment shooting to $2800 or $4000!
Prime second mortgages implosion.
This type of loan enabled a huge number of home title owners
to effectively invest 0% down payment in their original purchase.
Many lending institutions have cut off further withdrawals from
the home equity source, in a lockdown much like applying a tourniquet
to a bleeding limb. Wells Fargo once boasted this spring not
to be involved in subprime mortgages, but they possess $84 billion
of these worthless loans. Expect Wells Fargo to go bankrupt.
The bankrupt banks will not just have Wall Street addresses.
Pay option adjustable rate
mortgage implosion. Called 'Option ARMs' in the finance industry,
this category will make national news for their insanity in negative
amortization features. In volume, they will greatly eclipse
the subprime story, since the loan type involves all risk levels
of borrowers and all sizes of properties. Again, this feature
enabled many people to buy far too large a property. Shocking
statistics are cited in the special report, pertaining to these
truly reckless loans. Bear in mind that homes have fallen in
value, so underwater percentages in extreme cases of these loans
might be more than 25%!!! Analysts estimate that on many of these
Option ARM loans, home title owners are underwater by 15% to
20%. Many of these loans have seen their balances rise by 7%
per year for at least three years. These loans are more disguised
subprimes. The negative amortization features act like a timeduse
to explode, in a situation offering no hope of refinance, no
qualification for other loans, and no equity. They will go bust.
Hybrid interest only adjustable
rate mortgage implosion. The hybrids attracted borrowers by offering
a fixed low introductory teaser rate for a fixed three, five,
or seven years. After that period, they adjust annually. Again,
this feature enabled many people to buy far too large a property.
The 3/1 (3-year fixed, adjust every 1 year later) began to reset
in 2006, with many more in 2007. The 5/1 will begin to reset
in 2008, causing a nightmare. Many lenders offered Hybrid ARMs
to lower quality borrowers. Plenty such loans did not require
income verification. Like the Option ARM, the low teaser rate
caused the loan balance to rise during the introductory period,
thus leading to vast number of loans being under-water. Again,
refinance or new mortgage loans will not be approved. They will
go bust.
CONCLUSION
The downtrend in housing prices generally might actually motivate
banks and other lending institutions not to make more home loans. A tidal wave of foreclosures comes
soon, not related to subprime in any way, with California at
the epicenter. Mortgage bond holders of above described abusive
INSANE mortgage loans packaged into bonds will suffer massive
losses. For some, like Option ARMs, no bond market exists
anymore. The banks on the other hand will suffer from the
tidal wave of loan losses, much of which is deserved. My only
hope is that Wall Street banks suffer their fair share of the
pain. Home property values in some metropolitan areas are likely
to fall by 30% to 50% from peak, taking them back to 2000 and
2001 levels. THE ONLY SOLUTION IS UNTHINKABLE, A NATIONAL BAILOUT
OF THE MAJORITY OF HOME MORTGAGES AND MORTGAGE BONDS, SINCE THE
ENTIRE SYSTEM IS BROKEN IRREPARABLY.
The effect on the USDollar
and gold price is uncertain, but surely negative for the clownbuck
and positive for gold. As Persian Gulf oil producers watch in
horror, they will be increasingly motivated to cut their US$
formal currency pegs. The upcoming US mortgage debacle will kill
the USDollar as the recognized practiced endorsed world reserve
currency, with the abolition of the defacto PetroDollar standard
certain. The gold price will rise amidst the absolute hurricane
of low pressure asset deflation and colossal monetary inflation
to fight it. THE GOLD PRICE IS CONSOLIDATING NEAR AND ABOVE 800,
A DISPLAY OF STRENGHT AND RESILIENCE.
My dire forecast for 2008
is that the USDollar DX index will find its way to 65 and the
gold price will find its way to $1200 per ounce. A 10% to 15%
decline in the USDollar comes. A 30% to 50% rise in gold comes. The positive rub to investors is that
as the national emergency becomes more widely recognized, the
need to flood the bank & bond arenas, as well as the corporate
credit & household arenas, will become broadly understood
as desperate. Without that flood, the system will enter a deeper
economic recession than already is in progress. Without that
flood, the system will see the banking system actually fail.
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Dec 13, 2007
Jim Willie CB
 Jim Willie CB is the editor of the "HAT
TRICK LETTER"
email: jimwilliecb@aol.com
Willie Archives
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Jackass
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Trick Letter
Jim Willie CB
is a statistical analyst in marketing research and retail forecasting.
He holds a PhD in Statistics. His career has stretched over 26
years. He aspires to thrive in the financial editor world, unencumbered
by the limitations of economic credentials. Visit his website
at www.GoldenJackass.com. For personal questions
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