I’m going to tell you something that you probably already know. Americans are horrible savers. In fact, this trait has provided the perfect breeding ground for credit products that provide the illusion of real wealth. I’ve been hammering away in article after article going after the big players on Wall Street and […]
Related Posts:
■Are you a Debt Slave?
■Cultural Spending Neurosis: How a Nation Went From Prudence to Financial Decadence.
■Stop Saving Now and Spend Those Rebates! The Home Refinancing Well Has Run Dry.
■You Can Kiss $2.84 Trillion in Housing Equity Goodbye: The Continued Decline in Real Estate.
■The Plague of Housing: Why we Will Feel and Be Poorer Because of the Housing Bust.

I’m going to tell you something that you probably already know. Americans are horrible savers. In fact, this trait has provided the perfect breeding ground for credit products that provide the illusion of real wealth. I’ve been hammering away in article after article going after the big players on Wall Street and also going after unscrupulous lenders that have been the pushers of the credit products for this past decade that have led us to this current economic cliff. Yet there is sufficient blame to go around and one is the psychology of the American consumer.

As of 2008, the average household debt is $117,951 and this includes credit cards, installment loans, home equity loans, and mortgages. The New York Times has an excellent series regarding the “Debt Trap” and below is a graph that I will be talking about in great detail. If you are interested, click on the image to go to the New York Times interactive chart:

All in all Americans have over $2.5 trillion in consumer debt. This number is staggering. That is why during the first signs of any economic problems the first thing that came to mind to our financial politician wizards was an economic stimulus package. Of course the majority didn’t ask where the money came from but you can now thank higher consumer inflation for the byproduct of this action.

Yet this mentality is still guiding much of our economic and political policies. People have become addicted to credit as if it were some form of drug. Recently, many lenders especially those with high concentration loan portfolios in California have started closing off many consumers’ home equity line of credits. The reaction is very telling since it gives us an insight into how people view credit.

Many believe that this home equity line was similar to you having access to your regular savings account. That is, whenever you needed the money it would be there for you. This was one of the inventions that started in the 1990s and has exploded recently. As you can see in the interactive chart above, home equity loans really had no place in the market prior to the 1990s. The concept was that the equity was your ultimate safety net, not some modified credit card that would put your biggest asset at risk. Recently with the run-up in the housing bubble, American consumers with their lack of savings decided to tap into this resource to continue spending. So when many people realized that their home equity lines have been shut down, they felt as if they had their savings stripped away. This idea that access to debt is equivalent to access to wealth demonstrates the profound lack of financial knowledge from many in our country.

Why would people be so willing to spend money that they don’t have? This is where the discussion veers off from economics and begins to look at consumer behavior and psychology. People want to be loved and accepted. Just watch MTV or VH-1 for a few hours and you’ll see this for yourself through their advertising. What you’ll see are ads about looking a certain way or buying a certain fragrance and with this simple act, you will be loved or accepted (normally by a very attractive member of the opposite sex). Of course you’ll have to spend money on a certain product which is probably over priced.

You also see this in many of the local clubs and night spots here in Southern California. Pick anytime, if you go out on a single night, you’ll typically see a guy trying to impress his friends with a round of the most expensive spirits not because of the taste, but because of the price of the drink. The group like a Pavlovian experiment responds as, “wow, you are the [best, greatest, coolest, hottest, funniest] person alive!” So the condition is imprinted on the mind. That is, if you spend on an expensive item you will get recognition from the group. The fact that many of these clubs accept credit cards is a perfect place to watch this social experiment unfold. Watch how many people use cash.

Now carry this psychology over to home purchases and automobile purchases which are the two largest consumer debt items around. Buying that home was about being secure and having a place for your family. After all, who doesn’t want this? It’s not like someone is going to respond, “no, I actually don’t want my family to be secure and rather live under the San Gabriel River.” So many either feel the pressure directly from family and friends or indirectly from media campaigns and those in the industry. The idea of owning a home is deeply imbedded in the American psyche. It is a cultural archetype that even as a kid, many start drawing a home with a picket white fence and a dog as a reference to what home is.

Those in advertising produced excellent (meaning they got people to do a desired action) marketing campaigns that exploited this insecurity which many carry deeply. Some of you may have seen this Century 21 ad where a couple is debating over real estate:

*Click to watch full ad on YouTube (warning, you may become financially ill)

Think about what this ad is telling us. What does your gut tell you when you watch this? Try finding an ad that has a more financially prudent debate where the couple is sitting down with their accountant and going over the ratios on a conventional 30 year fixed mortgage. We didn’t see any of this because the entire industry would have halted! Hello! $397 average savings per year and people were going zero down on $500,000 starter homes? No wonder why our economy has placed a multi-year debt albatross that is slowly drowning us.

Amazingly, six in 10 Americans oppose Wall Street Bailouts but the majority do support the government keeping people in their homes:

*Source: Gallup

So why did the Bear Stearns bailout go through so quickly without going to the public? The answer is, many people simply do not care enough to cause an uproar about what occurred. They rather focus on saving 10 cents a gallon on oil while their mortgage payment just went up $500, $1,000, or even $2,000. The talking heads told us that if Bear Stearns wasn’t bailed out, the dark clouds of financial ruin would sweep over the nation and cover us in fire and brimstone. Guess what? We still ended up flying into a bear market and people are still losing their homes. We are getting this same rhetoric with Fannie Mae and Freddie Mac. A quick solution is nationalize the entities, split them up, and let the shareholders eat their risk. Enough with this implicit guarantee when we all know the taxpayer is on the hook.

The problem with Wall Street and bailing certain institutions out and this uttering of a second stimulus from politicians is they still believe that we are living in a world where people are willing to sacrifice their lives to go deeper into debt. They miscalculated on how people view housing. When the archetype dream of a picket white fence home came with a $4,000 a month mortgage payment, the sudden reality hit and many realized that the dream wasn’t worth the actual price tag. That is why the zero down craze was so utterly incompetent. Buyers had no skin in the game.

In places like California, buyers were effectively given a put option. The mortgage itself is non-recourse, meaning if there is a foreclosure the home goes back to the lender or bank and the buyer walks away with a foreclosure on their record. Many are electing to go down this route. Some by choice and many because they cannot afford the recasting payment or have seen a decrease in their income. Amazingly, the person that rents with a zero net worth now has a stronger financial position than the person that bought at peak levels and actually has a negative net worth of $100,000 or even $200,000.

The obsession with credit and the ultimate sign of debt the McMansion is now crumbling on its weak edifice. Our economy has been so dependent on debt and real estate for the past decade that we have fallen behind in many crucial areas like biotechnology and engineering because much of our capital and resources were diverted to non-productive sectors like building bigger and bigger homes accompanied by cars that are bigger and less fuel efficient. Slowly this is changing at least with the auto industry.

Many rational Americans looked around their neighborhood and saw what was a once in a lifetime spending binge. A boat, Hummer, and McMansion for all. The only problem is, it was on a temporary lease. The problem with this is that 70 percent of Americans were living like the top 1%:

*Source: Wikipedia

Many had to deal with cognitive dissonance of knowing incomes didn’t justify the spending they were seeing in the real world. The majority however decided to capitulate and get into unbelievable amounts of debt. It was a façade. The government is simply feeding into this cultural delusion that all the consumption items of debt reflected the actual income of our country but it did not as you can clearly see. No politician has the courage to say what needs to be said, “my fellow Americans, we have spent way beyond our means and need to change the way we live our lives.” Not during an election year. They will keep feeding into this myth that you can save nothing and sacrifice little and enjoy everything today even if you don’t actually have the savings to pay for it. Until we see some CEOs doing the perp walk instead of going to them for advice on saving the housing market (much of the problems created by them), then we will know that times are changing at the top. People need to demand this from their government or at the minimum, not buy into this financial myth.

We have $500 billion in Pay Option ARMs that are set to recast in the next few months. These are the absolute most toxic mortgages out there. I would put them on the same level as subprime loans and we are going to quickly realize that they too will be defaulting in high rates. Banks and lenders are artificially counting that these loans will still remain current once they do recast. If you look at their bottom line, they are actually counting much of the deferred interest as income. Many are current but not for long. They are betting that owners will exercise their put option but many will simply allow it to expire worthless.

I notice that parts of our cultural consumer psychology are changing. There was one commercial this weekend on a show that was targeted to the teen crowd that had a girl fixing up her dorm room. The room looked trendy and had all the knacks that someone could possibly need for college. She looks at the camera and tells us, “I got this all for a discount. After all, I am a math major.” It will now be cool to save if not for any other reason then there is no other option. There was also a segment on a show poking fun at those who waited in lines for the new iPhone. One of the actors was showing a new feature of, “using the phone to navigate for places for cheaper rent since I can’t afford my current place with this phone.” Time for the wake up call folks. Things are not going back to how they were.

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information

Post from: Dr. Housing Bubble Blog

American Savings: Americans Save an Average of $392 Per Year. Total Consumer Debt is over $2.5 Trillion. The Dark Knight of Debt.

Share This

Related Posts:
■Are you a Debt Slave?
■Cultural Spending Neurosis: How a Nation Went From Prudence to Financial Decadence.
■Stop Saving Now and Spend Those Rebates! The Home Refinancing Well Has Run Dry.
■You Can Kiss $2.84 Trillion in Housing Equity Goodbye: The Continued Decline in Real Estate.
■The Plague of Housing: Why we Will Feel and Be Poorer Because of the Housing Bust.

Via [DrHousingBubble]

Share This

It has been one week since Pasadena based IndyMac Bank was taken over by the FDIC. After the market closed on Friday, the FDIC had assumed control over the troubled institution which was the second largest bank failure in history with assets totaling $32 billion. Initially, since it had been a very long […]
Related Posts:
■IndyMac: IndyMac History and Collapse. The Saga of the Second Largest Bank Failure in History, here in Sunny Southern California.
■Bank Failure: IndyMac Bank. Lessons from the Great Depression Part XIV. Bank Failures.
■Affordable Housing: Finding Affordable Housing just got Easier in California.
■The Lords of Money Speak: Even the Prime Will Fall. Lessons From the Great Depression Part XV. The King JPMorgan Speaks.
■Fannie Mae and Freddie Mac: Government Sponsored Entities Finding Their way Back Home with a Bailout.

It has been one week since Pasadena based IndyMac Bank was taken over by the FDIC. After the market closed on Friday, the FDIC had assumed control over the troubled institution which was the second largest bank failure in history with assets totaling $32 billion. Initially, since it had been a very long time since a bank of this size had collapsed, many did not know what to expect. Uncertainty was fueled over the weekend when people were unable to access their accounts. On their website, a FDIC page was posted telling customers that the bank was now under full control of the FDIC.

As the institution opened on Monday, uncertainty turned into nervousness. Report after report discussed how people were withdrawing their money from the bank, even those who had insured deposits under the $100,000 FDIC limit. The mass influx of people overwhelmed the resources of the institution and many had to return the subsequent day.

At this point, people started worrying more about simply getting their money out. Bank lines and lists started to make their rounds in various locations:

*Source: OC Register Eugene Garcia

In some locations customers waited hours only to be told that they were unable to get their funds out. The heat and uncertainty turned into anger and frustration. Miscommunications occurred where lists were not approved officially from the FDIC so it was uncertain if they would be honored the next day. This did not bode well for many customers some who had been waiting from 1:30AM.

It is clear that the majority of customers from various reports were taking out their money even though the PR machine was fully saying, “this is the strongest bank in the country currently” - if that is the case, why was it taken over on a Friday afternoon without telling customers before hand even giving a slight warning?  Yes, against policy rules. Also, I’m sure those with $100,000 plus would have something else to say about that security.

As the week progressed and customers made their way with FDIC cashiers checks out, it turned out that some reports were stating that there may be some delay with other institutions honoring the checks coming from the institution. Clearly this caused more uncertainty with customers who further withdrew more funds. Amazingly some of the other institutions putting extreme holds on some of these checks are only weeks away from a similar position and they too are insured with the FDIC. Is this how they would want their customers to be treated in the future? From what it appears and legitimately so, many of these other institutions are on the lookout for fraud given the circumstances.  Unintended consequences.
At one location, the police were called out to settle customers down. Now of course this isn’t exactly the way to manage good PR. You’re threatening arrest on customers who want their money because your bank collapsed? They want their money because it did collapse! I’m surprised that some people say, “well this is irrational panic and people just need to calm down.” Actually, what is irrational is the mortgages this institution got involved in which led to its predictable demise. Today we have a very special Real Home of Genius Award for IndyMac Bank with a home right in its home city of Pasadena. Today we salute you IndyMac Bank with our Real Home of Genius Award.

IndyMac Bank and the Temple of Doomed Mortgages

Today’s home leads us to Pasadena California. This home has 3 bedrooms and 2 baths which is your typical bread and butter starter home. It sits on 1,283 square feet of patchy green grass. You would think that when you are selling a home, you would at least remove the kicked down sales sign from the lawn and the green garbage can before taking a picture but this is how collapsed banks do business. Hey, collapsing just doesn’t happen overnight! It happens over the weekend and once you see the history of this one example, you’ll begin to understand why banks like IndyMac are doomed in the upcoming months.

This place is listed on the IndyMac website at a sales price of $335,900 which for anyone in Southern California who knows about Pasadena, seems like a steal. Maybe it was a good deal a few years ago but not anymore. In today’s market, qualified buyers are actually demanding a decent product for the amount they’ll shell out. No longer can you get a toxic banana republic loan to fund your flipping or delusional real estate mogul dreams.

Yet now we are going to see how disorganized California real estate has recently become. There is this phenomenon where real estate owned properties are for some reason not showing up on public MLS real estate sites. Whether lenders are overwhelmed or simply do not care, this issue is not clear. What is clear with many of these toxic Pay Option ARM mortgages is that there is a fleet of owners right now in California that are one, two, three, or four months away from their payments skyrocketing 50 percent and above. With the median price of homes dropping by 30% across California, these homes are simply waiting to be foreclosed on. Yet the irony here is that these loans actually look profitable to many of the current note holders. Unlike subprime were people with very poor credit were given absurd mortgages and of course defaulted very quickly, these loans tend to go incognito for a much longer time. If you have a two or three year window were you are deferring interest and even some of your principal yet pay on time, all looks well on the balance sheet.

A large number of these borrowers are “good” credit folks who used up their home equity like an ATM and now are simply sitting waiting for that recast anniversary. These places are flat out doomed and with $500 billion recasting shortly, many of these lenders are simply waiting for their FDIC turn. This brief rally on Wall Street is a suckers rally. Jump in at your own peril.

If you think this REO idea is off, just look at this property. We can go to the Realtor.com website and search this Pasadena zipcode and take a look below:

*Source: Realtor.com

Oh where art thou? Shouldn’t $335,900 be in the middle here? Yes sir! But nowhere to be found. Big deal you may say right? Well if lenders aren’t reporting their inventory correctly it artificially makes the overall sale to inventory ratio look healthier than it really is. My gut tells me there is a lot of REO and defaulted property hidden from the public view right now simply because of NTS, NOD, and REO data being reported from other agencies.  Once recasts hit fully, the zombies will come out of the ground hungry for capital.

Yet if you want to know why these institutions failed, let us look at some of the pricing action:

*Source: Zillow.com

This place sold on February of 2007 for $575,000! How absurd is that? If a prime area like Pasadena can see a home drop 40% in slightly over a year, what about the loans they made in more troubled areas like the Inland Empire? Given that it was picked up in February of 2008 for roughly 80% of the peak price, I imagine that the lender simply took back the home. It was probably under an 80/20 which was so typical in California. Yet it has been sitting on the books for nearly 5 months and once it sells (if it sells for the current price) their will be a write-down. And once this brief euphoria is over, the overall stock market will punish these stocks again. They are all operating as if a bailout will be given to all. Nope. Unfortunately they only have the time and pseudo resources to go after the big boys of Fannie Mae and Freddie Mac.

Is it any wonder why IndyMac collapsed? These kind of loans should have never seen the light of day. Today we salute you IndyMac Bank with our Real Home of Genius Award.

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information

Post from: Dr. Housing Bubble Blog

IndyMac Bank: Bank Failure, Long Lines, and a Real Home of Genius. Another Reason why IndyMac Bank Failed.

Share This

Related Posts:
■IndyMac: IndyMac History and Collapse. The Saga of the Second Largest Bank Failure in History, here in Sunny Southern California.
■Bank Failure: IndyMac Bank. Lessons from the Great Depression Part XIV. Bank Failures.
■Affordable Housing: Finding Affordable Housing just got Easier in California.
■The Lords of Money Speak: Even the Prime Will Fall. Lessons From the Great Depression Part XV. The King JPMorgan Speaks.
■Fannie Mae and Freddie Mac: Government Sponsored Entities Finding Their way Back Home with a Bailout.

Via [DrHousingBubble]

Share This

Bank failures are not common occurrences. And seeing a large group of people lined up at 7:30AM in a prime Southern California location with distraught faces ready to withdraw their money from the now taken over IndyMac Bank was even more surreal. The idea of a large brick and mortar institution not keeping […]
Related Posts:
■The Lords of Money Speak: Even the Prime Will Fall. Lessons From the Great Depression Part XV. The King JPMorgan Speaks.
■IndyMac: IndyMac History and Collapse. The Saga of the Second Largest Bank Failure in History, here in Sunny Southern California.
■Affordable Housing: Finding Affordable Housing just got Easier in California.
■IndyMac Bank: Bank Failure, Long Lines, and a Real Home of Genius. Another Reason why IndyMac Bank Failed.
■The Sham of our Current Unemployment Rate Numbers: Lessons from the Great Depression: Part X. Data Mining.

Bank failures are not common occurrences. And seeing a large group of people lined up at 7:30AM in a prime Southern California location with distraught faces ready to withdraw their money from the now taken over IndyMac Bank was even more surreal. The idea of a large brick and mortar institution not keeping your money safe is enough to unnerve the strongest of us. Bank failures may seem like part of a distant past associated with the Great Depression or the S & L crisis but certainly not to our current era.

Since 2000, the FDIC has recorded 32 bank failures. I have compiled this list from FDIC data and have also added a column to show the amount of assets taken over. What you’ll find is digging into the data for yourself is much more telling than listening to the media:

So what is the big deal with IndyMac Bank? Take a look at this sobering fact:

IndyMac Bank Total Assets: $32 billion

All Other 31 Combined Bank Failures since 2000: $8.97 billion

Basically IndyMac Bank had about 4 times the amount of assets as all the other 31 bank failures of this decade combined. This is an important contrast since I’ve been seeing the media currently say things such as:

“We won’t have as many bank failures as the past…”

“Only 5 banks have failed this year…”

“We only have 90 banks on our troubled list…”

As you can see from the above, depending on which banks are on the list and their size, having a handful of bank failures the size of IndyMac Bank would be the equivalent of 500 to 1,000 smaller banks failing. It may come as no comfort that IndyMac wasn’t even on the troubled list.

In today’s article we are going to take a look at a few photos of what occurred on Monday. This is part XIV of our Lessons from the Great Depression series:

1. Personal Story by a Lawyer from a Previous Asset Bubble. Can we Learn from the Past and How will the Housing Decline Impact You?

2. Lessons From the Great Depression: A Letter from a former Banking President Discussing the Bubble.

3. Florida Housing 1920s Redux: History repeating in Florida and Lessons from the Roaring 20s.

4. The Menace of Mortgage Debts: Lessons from the Great Depression Series: Part IV: Where do we go After the Housing Crash?

5. Business Devours its Young: Lessons from the Great Depression: Part V: Destroying the Working Class.

6. Crash! The Housing Market Free Fall and Client #10 Contagion.

7. Winston Smith and the Bailouts in Oceania: Lessons from the Great Depression Part VII.

8. Sheep Back to the Slaughter: Lessons from the Great Depression Part VIII: All the Change and Bear

Market Rallies.

9. A Bubble That Broke the World

10. The Sham of our Current Unemployment Numbers

11. Understanding the Impact of Asset Deflation and Consumer Inflation.

12. Is the DOW now Tracking with the California Housing Market?

13. The Federal Reserve.

Photos Then and Now

Reports from all across Southern California discussed the panicked mood of many customers at IndyMac locations all across multiple cities. Eugene Garcia over at the Orange County Register has been kind enough to give us permission to use some of the photos:

*Source: OC Register Eugene Garcia

In this picture you’ll notice a line that according to reports, had approximately 100 people. You’ll also notice that a large number of the customers are nearing or in retirement. Not a good place to be in especially if you are dependent on this money and had over $100,000:

“(LA Times) But an estimated 10,000 IndyMac customers had deposits that exceeded those limits. Among them was 70-year-old Charles Tengeri, a retired teacher from Pasadena, who arrived at IndyMac’s headquarters at 4 a.m. and grabbed one of the first spots in line.

Tengeri had more than $200,000 in five certificate of deposit accounts — his life savings, he said. After waiting five hours, he left with a check for $171,000.

“It’s not 100%, but it’s better than nothing,” said Tengeri, who still has more than $50,000 tied up in the bank. “It’s not fair. . . . I’m praying for it, I’m crossing my fingers for it, but I don’t know.”

In this case, assuming the total deposit in the bank was $221,000 leaving the bank with $50,000 locked up is a 22% reduction of the original amount. That is a hefty amount given that you are not suppose to lose any of your principal at a bank. According to reports, $1 billion of deposits are beyond the $100,000 FDIC limit. No wonder why folks at a Mission Viejo location had one thing on their minds:

*Source: OC Register Eugene Garcia

It is pretty clear what the intention of today’s visit was. The FDIC tried to reassure people that their money was fine but most folks do not want to leave their money in an institution that gambled recklessly in the housing market. Why would they? There are other institutions that are sounder and people now realize that old mantras like “real estate never goes down” are sometimes hard sales pitches. People are looking to protect their money. And if you think people are trusting their government who have recklessly allowed the dollar to plummet and have squandered any semblance of prudence, think again. People are now starting to push the first domino on other institutions:

“(LA Times) Anne Martin, 56, wasn’t taking any chances Monday. She went first to an IndyMac branch in Arcadia to liquidate a certificate of deposit, then planned to go to Downey Savings, where she intended to close another CD amid speculation it would be the next bank to fail.

“I’m going there after this,” she said. “I know they did a lot of loans, and I’m afraid they’re going to be caught up in the same situation.”

At a Downey branch in Arcadia, Doris Crosby of Pasadena was transferring money from another bank, where it hadn’t been insured, into her checking account despite hearing rumors that Downey was in trouble.

“I just have this feeling I’m jumping from one frying pan to another,” Crosby, 82, said. “I just don’t know what to do.”

People are simply not happy about this and rightfully so. Here is a picture from a different angle at the Laguna Woods location:

*Source: OC Register Eugene Garcia

There were reports from long lines at:
Pasadena

Los Angeles
Laguna Woods

Mission Viejo

Long Beach

And I’m sure other locations had similar reactions. Although the housing crisis and credit debacle have been going on for sometime, seeing large banks in trouble and people scrambling for their money will hopefully light a fire with our politicians. Unfortunately they take this as a pass to bailout every nook and cranny of the economy but all we get is corporate welfare for those on Wall Street while middle class Americans, many pictured above struggle to keep enough money for a dignified retirement.

The reason these pictures are so rare is that you would have to go back to the Great Depression to see long lines of people waiting to take their money out of large banking institutions:

If the FDIC is telling us that we have 90 to 150 more troubled banks, how can anyone say with a straight face that we will have a second half recovery? In fact, according to current government measurements we aren’t even in a recession! According to government data, inflation is moderate, unemployment is dandy, and we are following a strong dollar policy. I think people are now realizing the emperor has no clothes and are starting to awake from a decade long financial apathy quelled by debt.

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information

Post from: Dr. Housing Bubble Blog

Bank Failure: IndyMac Bank. Lessons from the Great Depression Part XIV. Bank Failures.

Share This

Related Posts:
■The Lords of Money Speak: Even the Prime Will Fall. Lessons From the Great Depression Part XV. The King JPMorgan Speaks.
■IndyMac: IndyMac History and Collapse. The Saga of the Second Largest Bank Failure in History, here in Sunny Southern California.
■Affordable Housing: Finding Affordable Housing just got Easier in California.
■IndyMac Bank: Bank Failure, Long Lines, and a Real Home of Genius. Another Reason why IndyMac Bank Failed.
■The Sham of our Current Unemployment Rate Numbers: Lessons from the Great Depression: Part X. Data Mining.

Via [DrHousingBubble]

Share This

When the House of Morgan speaks, people listen. There are very few banks that carry an aurora of royalty like that of JPMorgan. Unlike our brethren in Europe or Asia, long historical banks or families simply do not exist in our nation’s short history. The life of American financier, bankers, and art […]
Related Posts:
■Bank Failure: IndyMac Bank. Lessons from the Great Depression Part XIV. Bank Failures.
■Bipolar Housing: Lessons from the Great Depression: Part XI. Understanding the Impact of Asset Deflation and Consumer Inflation.
■The Psychology of Ben Bernanke: The Great Depression was caused by the Federal Reserve. Was he Talking About the current Great Depression that is Sprouting Under his Watch? Lessons From the Great Depression: Part XIII. The Federal Reserve.
■The Day Housing Faced the Plague of Locusts: Lessons from The Great Depression Part XIII. Facing our Own Economic Pilgrimage.
■The Sham of our Current Unemployment Rate Numbers: Lessons from the Great Depression: Part X. Data Mining.

When the House of Morgan speaks, people listen. There are very few banks that carry an aurora of royalty like that of JPMorgan. Unlike our brethren in Europe or Asia, long historical banks or families simply do not exist in our nation’s short history. The life of American financier, bankers, and art collector John Pierpont Morgan with the ability to merge Edison General Electric and Thompson-Houston Electric into the mega conglomerate General Electric, is one of great historical reference and study.

Morgan entered banking in 1857 in his father’s London location and then moved to New York City with the knowledge he learned. During the Civil War Morgan was approached to purchase old rifles being sold from the army at $3.50 each. One of Morgan’s partners retooled the rifles and sold them back to the army for $22 each. This was touted by some as a scandal but the army knew the weapons were retooled; what this highlighted was the ability of the government to spend more than it should and also, brought to light inefficiencies in large bureaucracies.

This is part XV in our Great Depression series. Below you’ll find the latest five articles:

10. The Sham of our Current Unemployment Numbers

11. Understanding the Impact of Asset Deflation and Consumer Inflation.

12. Is the DOW now Tracking with the California Housing Market?

13. The Federal Reserve.

14. Bank Failures.

Morgan had an uncanny ability of taking over businesses and reorganizing them. He had a reputation that would be similar to something of a Warren Buffet in our day and age. Yes, they played in the economy in different roles but their ability to be successful is born from the same ability to make businesses work.

During the Panic of 1893, the Federal Treasury was nearly out of gold. Yes, they actually used gold back then unlike our current system where money is made up out of thin air. During this panic the President at the time Grover Cleveland asked Morgan to help supply the U.S. Treasury with $65 million in gold with half coming from Europe to restore the treasury surplus. This move saved the Treasury. During the 1896 campaign Republican William McKinley ran under the gold standard platform.

It is incredible to think how much power Wall Street had back then. One year before his death in 1912, Morgan testified before the Pujo Committee, a subcommittee of the House Banking and Currency committee regarding finance and banking. As it turned out, a small group of financial leaders were abusing their public trust and consolidating power to the hands of an extreme few. Morgan died in March of 1913.

Many books have been written about J.P. Morgan. His life is more complex than a single article can sum up but suffice it to say that it is an intriguing one that has left a historical impression on the life of American finance. The fact, that the House of Morgan was the one who stepped in to save Bear Stearns with the aid of the Federal Reserve should tell you how the American finance system is structured. It wasn’t Bank of America that stepped up.  Maybe to soothe their ego they took over Countrywide trying to gain some love from daddy at the Federal Reserve?

Now why is this relevant to what is going on today? Well it is relevant because there are very few institutions that have the ability to tell you how it is with little fear of repercussions. Many firms including the now taken over IndyMac Bank were assuring the public that they were fine up until the day they were taken over by the FDIC. Even Bear Stearns was telling the public all was well before that faithful weekend when they were sold off for a token $2 a share. Yet JPMorgan Chase & Company with their current CEO Mr. Dimon recently came out with a few simple words that essentially sum up the current situations. Mr. Dimon told analysts on a call that mortgage problems were now spreading to prime mortgages:

(Housingwire) “Prime looks terrible,” he told analysts on the call. “And we’re sorry, and there’s nothing else we can say.”

The company currently holds $34.4 billion of jumbo mortgages, along with $2.5 billion of Alt-A mortgages. Net charge-offs among prime loans in the second quarter rose to $104 million, more than double the $50 million recorded just one quarter earlier. JP Morgan jumped in headlong into jumbos and Alt-A mortgages during 2007 - obviously an ill-timed bet, given where the market has headed.

“We were wrong, we obviously wish we hadn’t done it,” Dimon told analysts. “We’re very early in the loss curve.”

This is as honest as any top CEO has come out in the recent housing debacle. To take ownership of a blunder in your company plan. The fact that we are now being told that “prime looks terrible” is simply another way of saying we are now all in this mess. No one in this country will be able to hide from the hideous repercussions of this housing and credit bubble bursting.

Yet it is important not to setup a system where we are doomed to repeat similar mistakes in the future. The knee-jerk response to trying to save Fannie Mae and Freddie Mac, trying to symbolically go after a select few naked short sellers, and making a public spectacle of the public’s money is coming to an end. The Federal Reserve came into existence signed in by President Wilson in 1913, after the death of J.P. Morgan:

The Federal Reserve Act spells out their purpose:

“To provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.”

Well they succeeded on an “elastic” currency since it is has been bouncing off the walls these last few years. Should we even discuss the supervision component? The fact the IndyMac Bank is now under the FDIC and other banks are hanging by their nails speaks for itself. The fact that the investment banks on Wall Street are holding a hand grenade of credit default swaps and have essentially insured mutually assured destruction goes to show that supervision once again was not there.

And this goes beyond Ben Bernanke. This stems back to Alan Greenspan who under his watch, allowed the balloon to inflate to the current point of global financial destruction. Anyone thinking that we are out of the woods because a brief bear market rally last week is simply deluding themselves. Take a look at the raw numbers in terms of bad mortgages, foreclosures, bank balance sheets, and you’ll quickly realize that we are standing at the edge of Niagara.

If you want to gain some perspective, it may be helpful to look at a letter of a banking president during the height of the Great Depression:

“This is a shameful and humiliating exhibition. It is uniquely bad. Across the border in Canada, there was not a single bank failure during our period of depression, and one must go back to 1923 to find even a small one. Nowhere else in the world at any time, were it a time of war, or of famine, or of disaster, has any other people recorded so many bank failures in a similar period as did we. We were not experiencing a war, a famine or any other natural disaster. All the economic tribulations we have undergone in the past three years have been man-made troubles, and Nature has continued to shower us with an easy abundance - more, indeed, than we have known how to distribute with economic wisdom.

Human stupidity and cupidity were the taproots of this great financial disaster. Those are evils which will always best us. There have, however, been revealed faults and weaknesses in our banking and investment practices that account in part for the extreme nature of this experience. Isn’t it about time that we began thoughtfully to examine some of the fundamentals of our banking and investment theories and methods?”

The question is, are we going to continue fueling policies that clearly led us into this mess or are we going to finally sit down and examine the actual premise of our entire system? Here in California, it appears that both parties are more interested in getting re-elected than actually coming up with long-term sustainable solutions.  I think that is key here.  What is sustainable for our nation in the long run?  Clearly debt isn’t. Government officials would rather borrow and expect that money will grow on trees. Yet this is checkmate folks. Some don’t like the comparisons to the Great Depression but when I drive down to work and see huge lines of customers trying to get their money out here in California in a desperate panic from an institutions that made absolutely absurd loans, what other comparisons do we have? I think many people for the first time in their lives are seeing housing prices go down nationally (first time since the Great Depression), bank runs, a crumbling dollar, and unemployment that realistically is hovering around 10 percent if we count those underemployed and those who have simply given up looking for work.

What Mr. Dimon is saying is things are as bad as they look. It will take time to fix. Yet why compound these mistakes by giving carte blanche to the institutions that got us here in the first place? The Federal Reserve could have stopped this mess before it got out of hand with Alan Greenspan. He could have raised rates and used his rightful jurisdiction provided by the Federal Reserve Act of supervising banks but instead chose to lower rates and become a cheerleader for adjustable rate mortgages. And now, we want to give the Federal Reserve more power?

Mr. Dimon may have summed it up when he said, “And we’re sorry, and there’s nothing else we can say.”

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information

Post from: Dr. Housing Bubble Blog

The Lords of Money Speak: Even the Prime Will Fall. Lessons From the Great Depression Part XV. The King JPMorgan Speaks.

Share This

Related Posts:
■Bank Failure: IndyMac Bank. Lessons from the Great Depression Part XIV. Bank Failures.
■Bipolar Housing: Lessons from the Great Depression: Part XI. Understanding the Impact of Asset Deflation and Consumer Inflation.
■The Psychology of Ben Bernanke: The Great Depression was caused by the Federal Reserve. Was he Talking About the current Great Depression that is Sprouting Under his Watch? Lessons From the Great Depression: Part XIII. The Federal Reserve.
■The Day Housing Faced the Plague of Locusts: Lessons from The Great Depression Part XIII. Facing our Own Economic Pilgrimage.
■The Sham of our Current Unemployment Rate Numbers: Lessons from the Great Depression: Part X. Data Mining.

Via [DrHousingBubble]

Share This

It has been one week since Pasadena based IndyMac Bank was taken over by the FDIC. After the market closed on Friday, the FDIC had assumed control over the troubled institution which was the second largest bank failure in history with assets totaling $32 billion. Initially, since it had been a very long […]
Related Posts:
■IndyMac: IndyMac History and Collapse. The Saga of the Second Largest Bank Failure in History, here in Sunny Southern California.
■Bank Failure: IndyMac Bank. Lessons from the Great Depression Part XIV. Bank Failures.
■Affordable Housing: Finding Affordable Housing just got Easier in California.
■Fannie Mae and Freddie Mac: Government Sponsored Entities Finding Their way Back Home with a Bailout.
■Real Homes of Genius: Today we Salute you Compton. $321,000 for 594 Square Feet! Can You Really Get Two Bedrooms Into That Space?

It has been one week since Pasadena based IndyMac Bank was taken over by the FDIC. After the market closed on Friday, the FDIC had assumed control over the troubled institution which was the second largest bank failure in history with assets totaling $32 billion. Initially, since it had been a very long time since a bank of this size had collapsed, many did not know what to expect. Uncertainty was fueled over the weekend when people were unable to access their accounts. On their website, a FDIC page was posted telling customers that the bank was now under full control of the FDIC.

As the institution opened on Monday, uncertainty turned into nervousness. Report after report discussed how people were withdrawing their money from the bank, even those who had insured deposits under the $100,000 FDIC limit. The mass influx of people overwhelmed the resources of the institution and many had to return the subsequent day.

At this point, people started worrying more about simply getting their money out. Bank lines and lists started to make their rounds in various locations:

*Source: OC Register Eugene Garcia

In some locations customers waited hours only to be told that they were unable to get their funds out. The heat and uncertainty turned into anger and frustration. Miscommunications occurred where lists were not approved officially from the FDIC so it was uncertain if they would be honored the next day. This did not bode well for many customers some who had been waiting from 1:30AM.

It is clear that the majority of customers from various reports were taking out their money even though the PR machine was fully saying, “this is the strongest bank in the country currently” - if that is the case, why was it taken over on a Friday afternoon without telling customers before hand even giving a slight warning?  Yes, against policy rules. Also, I’m sure those with $100,000 plus would have something else to say about that security.

As the week progressed and customers made their way with FDIC cashiers checks out, it turned out that some reports were stating that there may be some delay with other institutions honoring the checks coming from the institution. Clearly this caused more uncertainty with customers who further withdrew more funds. Amazingly some of the other institutions putting extreme holds on some of these checks are only weeks away from a similar position and they too are insured with the FDIC. Is this how they would want their customers to be treated in the future? From what it appears and legitimately so, many of these other institutions are on the lookout for fraud given the circumstances.  Unintended consequences.
At one location, the police were called out to settle customers down. Now of course this isn’t exactly the way to manage good PR. You’re threatening arrest on customers who want their money because your bank collapsed? They want their money because it did collapse! I’m surprised that some people say, “well this is irrational panic and people just need to calm down.” Actually, what is irrational is the mortgages this institution got involved in which led to its predictable demise. Today we have a very special Real Home of Genius Award for IndyMac Bank with a home right in its home city of Pasadena. Today we salute you IndyMac Bank with our Real Home of Genius Award.

IndyMac Bank and the Temple of Doomed Mortgages

Today’s home leads us to Pasadena California. This home has 3 bedrooms and 2 baths which is your typical bread and butter starter home. It sits on 1,283 square feet of patchy green grass. You would think that when you are selling a home, you would at least remove the kicked down sales sign from the lawn and the green garbage can before taking a picture but this is how collapsed banks do business. Hey, collapsing just doesn’t happen overnight! It happens over the weekend and once you see the history of this one example, you’ll begin to understand why banks like IndyMac are doomed in the upcoming months.

This place is listed on the IndyMac website at a sales price of $335,900 which for anyone in Southern California who knows about Pasadena, seems like a steal. Maybe it was a good deal a few years ago but not anymore. In today’s market, qualified buyers are actually demanding a decent product for the amount they’ll shell out. No longer can you get a toxic banana republic loan to fund your flipping or delusional real estate mogul dreams.

Yet now we are going to see how disorganized California real estate has recently become. There is this phenomenon where real estate owned properties are for some reason not showing up on public MLS real estate sites. Whether lenders are overwhelmed or simply do not care, this issue is not clear. What is clear with many of these toxic Pay Option ARM mortgages is that there is a fleet of owners right now in California that are one, two, three, or four months away from their payments skyrocketing 50 percent and above. With the median price of homes dropping by 30% across California, these homes are simply waiting to be foreclosed on. Yet the irony here is that these loans actually look profitable to many of the current note holders. Unlike subprime were people with very poor credit were given absurd mortgages and of course defaulted very quickly, these loans tend to go incognito for a much longer time. If you have a two or three year window were you are deferring interest and even some of your principal yet pay on time, all looks well on the balance sheet.

A large number of these borrowers are “good” credit folks who used up their home equity like an ATM and now are simply sitting waiting for that recast anniversary. These places are flat out doomed and with $500 billion recasting shortly, many of these lenders are simply waiting for their FDIC turn. This brief rally on Wall Street is a suckers rally. Jump in at your own peril.

If you think this REO idea is off, just look at this property. We can go to the Realtor.com website and search this Pasadena zipcode and take a look below:

*Source: Realtor.com

Oh where art thou? Shouldn’t $335,900 be in the middle here? Yes sir! But nowhere to be found. Big deal you may say right? Well if lenders aren’t reporting their inventory correctly it artificially makes the overall sale to inventory ratio look healthier than it really is. My gut tells me there is a lot of REO and defaulted property hidden from the public view right now simply because of NTS, NOD, and REO data being reported from other agencies.  Once recasts hit fully, the zombies will come out of the ground hungry for capital.

Yet if you want to know why these institutions failed, let us look at some of the pricing action:

*Source: Zillow.com

This place sold on February of 2007 for $575,000! How absurd is that? If a prime area like Pasadena can see a home drop 40% in slightly over a year, what about the loans they made in more troubled areas like the Inland Empire? Given that it was picked up in February of 2008 for roughly 80% of the peak price, I imagine that the lender simply took back the home. It was probably under an 80/20 which was so typical in California. Yet it has been sitting on the books for nearly 5 months and once it sells (if it sells for the current price) their will be a write-down. And once this brief euphoria is over, the overall stock market will punish these stocks again. They are all operating as if a bailout will be given to all. Nope. Unfortunately they only have the time and pseudo resources to go after the big boys of Fannie Mae and Freddie Mac.

Is it any wonder why IndyMac collapsed? These kind of loans should have never seen the light of day. Today we salute you IndyMac Bank with our Real Home of Genius Award.

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information

Post from: Dr. Housing Bubble Blog

IndyMac Bank: Bank Failure, Long Lines, and a Real Home of Genius. Another Reason why IndyMac Bank Failed.

Share This

Related Posts:
■IndyMac: IndyMac History and Collapse. The Saga of the Second Largest Bank Failure in History, here in Sunny Southern California.
■Bank Failure: IndyMac Bank. Lessons from the Great Depression Part XIV. Bank Failures.
■Affordable Housing: Finding Affordable Housing just got Easier in California.
■Fannie Mae and Freddie Mac: Government Sponsored Entities Finding Their way Back Home with a Bailout.
■Real Homes of Genius: Today we Salute you Compton. $321,000 for 594 Square Feet! Can You Really Get Two Bedrooms Into That Space?

Via [DrHousingBubble]

Share This

It is rather appropriate that the second largest savings and loan failure in history that of IndyMac Bank occurs here in Southern California. IndyMac is based out of Pasadena California, an upper-middle class city within the concrete jungle of the 88-city metropolis. With a stunning $32 billion in assets, this is by far one […]
Related Posts:
■Bank Failure: IndyMac Bank. Lessons from the Great Depression Part XIV. Bank Failures.
■Fannie Mae and Freddie Mac: Government Sponsored Entities Finding Their way Back Home with a Bailout.
■Affordable Housing: Finding Affordable Housing just got Easier in California.
■Real Homes of Genius: $438,000 for 816 square feet in Pico Rivera! Another Example of Manic SoCal Housing!
■Real Homes of Genius: Today we Salute you Compton. $321,000 for 594 Square Feet! Can You Really Get Two Bedrooms Into That Space?

It is rather appropriate that the second largest savings and loan failure in history that of IndyMac Bank occurs here in Southern California. IndyMac is based out of Pasadena California, an upper-middle class city within the concrete jungle of the 88-city metropolis.

With a stunning $32 billion in assets, this is by far one of the largest failure in decades. And of course, the FDIC with their usual dark suit posse swooped in after the market had closed on Friday to not spook the sheep in the public. Add this one to the list as the fifth bank failure of the year:

Source: FDIC

Just to put this into perspective in relation to the other failures this year:

Douglas National Bank: $7.3 million in assets

Hume Bank: $11.2 million in assets

ANB Financial: $2.1 billion in assets

First Integrity Bank: $35.8 million in assets

IndyMac Bank: $32 billion in assets

That is how large this closure is. They also have $19.06 billion in total deposits with approximately $1 billion that does not fall within the $100,000 FDIC insured prevue.

It is important to understand the history and how this institution was bred to take us through memory lane of the now defunct savings and loan.

IndyMac Spawn of Countrywide

Countrywide Mortgage Investment was founded in 1985 as a dumping ground for loans that were too big from the original mortgage sausage maker, Countrywide Financial. Ironically, these were the loans that were too big to be sold to big brother Fannie Mae and Freddie Mac which have their own obscure and fascinating history. In 1997, Countrywide Financial decided to spin the company off as an independent unit which is (was) the beloved IndyMac Bank.

IndyMac Bank profited handsomely during the decade long housing and credit bubble. They expanded their services by acquiring Financial Freedom in 2004 who were experts in the reverse mortgage business. The only problem with having reverse mortgages is you have to have equity in your home which of course is now becoming rarer with the housing collapse. As the FDIC sorts through the mess, I’m sure this piece of the pie will be bought off since there is a legitimate viable market with the many baby boomers that will be retiring soon. In the midst of all the mortgage mess it is easy to forget that housing for the most part is a good investment. Approximately one-third of those who own their home have no mortgage. Many of these are facing retirement soon. So we’ll see how the vultures divvy up the $32 billion in assets.

IndyMac like many alternative lenders was simply another casualty of the housing Ponzi scheme. During the boom days, IndyMac soared to peak share price of $50 during the peak in 2006. In fact, in September of 2006 CEO Michael Perry went on CNBC to give this brief interview:

*Click on picture to watch 3 minute video

Some lovable quotes from the video:

“only a quarter in option arms…”

You mean the $500 billion in Pay Option ARMs that are now collapsing? What about those Alt-A toxic loans that are now falling apart like sub-prime mortgages?

“the borrowers have very strong credit…”

The ultimate misnomer of the Alt-A phony baloney bubble. Just because you have a 700 credit score and make $100,000 a year does not mean you can afford a $900,000 mortgage on a home. Especially now that the home is worth $600,000 and your $100,000 income came from an industry tied to real estate. Whoops.

“borrowers know what they are getting into…”

Yes sir they did! So much so that your institution was taken over 1 year and 10 months from this interview.

“half of our business is owners accessing the equity in their homes…”

Hard to access money from a home that is now down 35% and you are in a negative equity situation.

The point being is that the model was completely flawed and the only reason institutions like IndyMac lasted as long as they did was the false pretense that somehow credit worthy borrowers knew what they were doing when they took out Alt-A and Pay Option ARMs on over priced homes. The lender like the borrower on these uber priced homes both were speculating and playing into this Ponzi housing game. Like any Ponzi scheme, those that can get in early usually make out very well. It is those that get in late who stand to lose the most.

Keep in mind when this interview was given, California was still going hot and strong. In fact, at this time Los Angeles had a median priced home of $509,000 that was up from the previous year by 3 percent. The market kept on going strong until August of 2007 when the housing market in Los Angeles peaked at $550,000. Let us take a quick look to see how IndyMac quickly disintegrated once the housing bubble collapsed especially when the market in California started tanking in 2007:

Here is some interesting information:

Peak Price $50 per share

Market Cap at Peak: $5.04 billion

Current share price is 10 cents

Current Market cap: $10 million

Basically the current market cap is enough to buy half of Ed McMahon’s foreclosed home in Beverly Hills. Problems really started happening at IndyMac in 2007. Now we have some of Kudlow’s minions who believe in the psychological recession trying to pinpoint the collapse of IndyMac on letters released by Senator Charles Schumer on June 26, 2008 urging regulatory agencies to take steps to prevent IndyMac’s collap