Posts filed under “Credit”
Fascinating front page WSJ article today, titled More Debtors Use Bankruptcy To Keep Homes.
It seems that Chapter 13 filings are gaining in popularity. Why? Because they halt foreclosure proceedings:
“Last month, as the nation’s housing slump continued, consumer
bankruptcy filings increased almost 23% from a year earlier –
representing nearly 69,000 people — according to the American
Bankruptcy Institute, a nonprofit research group whose members include bankruptcy attorneys, judges and lenders. Overall, consumer bankruptcy filings were up 44.76% during the first nine months of this year.
In some areas where the real-estate boom was especially heated, the increase in filings has been even sharper — especially for a type of bankruptcy that allows homeowners to halt foreclosures on their homes . . .
In recent months, however, an increasing number of homeowners have filed for bankruptcy under Chapter 13, which staves off foreclosure proceedings while the homeowner works out a plan to pay off mortgage debt and other obligations over time — usually three to five years. To qualify, debtors must have a regular income and must stay current on their new bills. About four in 10 filers today are filing under Chapter 13 — up from three in 10 two years ago. The 2005 change in bankruptcy laws was designed in part to shift more filers to Chapter 13, which forgives less debt than Chapter 7.”
We can expect to see a whole lot more these types of filings in the coming months and years. Why? One word: RESETS.
The ongoing APR mortgage reset process isn’t expected to peak until some time in 2008. Following that, we see a new surge in resets, as Option Adjustable Mortgages begin to come up in 2010-11. Note that these are non-subprime mortgages.
Here is is another intriguing pair of charts, this one from Merrill Lynch (via the IMF):
The pair of charts above suggests that as the last cycle progressed, Credit quality
mattered less each subsequent year. Eventually, it seems that mortgage underwriters were giving loans to
just about anyone in order to generate fees, commissions, and re-sellable paper . . .
More Debtors Use Bankruptcy To Keep Homes
Chapter 13 Filings Gain In Popularity Because They Halt Foreclosures
WSJ, October 23, 2007; Page A1
Global Financial Stability Report:
Financial Market Turbulence: Causes, Consequences, and Policies
IMF, September 2007
Yesterday, Traders embraced the release of the FOMC minutes. Indices were flat up until just before the 2:00pm release, and then took off, with the Dow gaining near 1%.
The thinking behind the Fed action was clearly revealed in that release. The emphasis was on the subsequent impact of credit on the entire system. The WSJ reported:
"Federal Reserve officials worried that credit-market
turmoil could reinforce slower growth at a time of "particularly high
uncertainty," leading to their half-point interest-rate cut last month,
minutes from the meeting show.
Without a cut, there was concern that "tightening
credit conditions and an intensifying housing correction would lead to
significant broader weakness in output and employment," the
rate-setting Federal Open Market Committee said. The minutes, released
yesterday, also showed members worried that market turmoil "might
persist for some time or possibly worsen."
They offered no clues about
the direction or timing of the Fed’s next move."
That last sentence is quite intriguing. Understanding whether or not a rate cut is forthcoming impacts yields, stocks prices, etc.
Given the significance of the Fed’s action, one would suppose that the markets which trade the Fed Futures would be, if not prescient, than at least telling about their future price action. One of the more fascinating aspects about this, however, has been the way the Fed Fund Futures have functioned over this time. They have been wildly wrong, forecasting an imminent rate cut since January 2006. I thought it might be instructive to look at why this maybe so, and what it might mean . . .
Yesterday, we discussed the potential impact of the ongoing weakening of the US dollar.
Today, we look at a few
printing press Money Supply issues. Our focus: The spread between the Fed liquidity action (a/k/a Repos) and the M2 money supply measures.
This is simply a measure of how much cash the Fed is injecting into the system.
The following Bloomberg chart shows the spread between the two of these monetary measures. It is quite instructive:
Speaking of surges: As you can clearly see above (bottom left chart), the amount of MZM (repos) versus M2 during 2007 is enormous.
This means that the Fed is "inflating" at a rate faster today than it did right after 9/11, or during the deflationary scare of 2003.
As we asked Wednesday night, "What did the Fed Chair and the FOMC see that spooked them into a half point (over) reaction?" I am not sure what is was (and we’ve discussed many of the potential issues over the past 2 years), but the Fed is obviously scared witless.
Why? One way to think about it is supply and demand. Print ALOT more dollars and each one is worth a little less.
Or, consider it this way: Extracting Oil or Gold from the earth ain’t easy: We have to explore for Oil, determine where it is, how deep, what quality, etc. Then we have to use lots of heavy machinery to extract it, ship it to where it gets processed, refined, used in chemical manufacturing. Some of it gets refined into gasoline, and it is then transported to a network of gasoline stations, and it gets pumped into your car — all for less per gallon than diet Coke or peach Snapple!
For gold, the process is not all that dissimilar.
Just crank up the printing press: Its cheap and easy. But why should us gold and oil producers exchange our hard won commodities (its hard work) for pieces of paper you people are simply cranking out for free? Either give us something of real value — or instead, we will insist on more of your crappy ittle pieces of green paper.
Thus, the inflationary repercussions of a "free money" policy. In fact, every commodity that is priced in dollars can potentially see much higher prices: Gold, Oil, Wheat, Soybeans, Copper, Timber, Corn, etc.
Its easy to understand why inflation has been called The Cruelest Tax.
BTW, for those of you without a pricey Bloomberg terminal on their desks, a good source for (free) data of this kind is the Federal Reserve Bank of St. Louis’ publication, Monetary Trends. There are always a solid collection of charts showing money supply, economic conditions, etc. Not to get too wonky on you, but this is simply pornography for econ geeks.
There are a few charts after the jump worth reviewing. For the less visual of you, they show that Money Supply continues to grow at a rapid pace, that bank borrowings are increasing.
Federal Reserve Bank of St. Louis’
Where Crude Goes Now May Depend on Dollar
Futures Close Near $82
WSJ, September 20, 2007; Page C1
Inflation Fears Send Gold to 27-Year High
Weakening Dollar Also an Influence; Metal Hits $732.40
WSJ, September 21, 2007; Page C6