Nearing end of the credit crisis?

Speaking as King Doomer, I think Goldman is right. It's completely unrelated to the housing crisis, however; it merely means that all the mortgage-backed securities will have been written down to 0. Doesn't affect foreclosures, resets, affordability, etc., at all.

I know he's a smart guy, but can't believe this came out of his mouth:

Likening the crisis to the periods in an American football game, Blankfein said that ``we're maybe at the end of the third quarter, or the beginning of the fourth.'' He warned that fourth quarters often last longer because of time-outs, and sometimes go into overtime. ``No promises on how long that is,'' he said.

Saw a statistic on TV the other day that $1.5 trillion in 3 yr ARMs are due to reset in the near future. How does that affect all this?

street_easy, that depends on the ARM. Fed Funds rate is 2.25%, 1-month LIBOR is 2.72%, 3-month LIBOR is 2.71%. Those are common base rates. Common spreads are anywhere from +2.25% to +2.75% above base.

If you started out with a low teaser rate you're in for a hit. If, like me, you have a rate pegged to the FF rate +2.25%, then my rate would go down from 5.125% to 4.50%.

Sounds good to me.

street_easy, nothing to keep folks from foreclosing, but if they do, technically the write-down would have already occurred for the owner of the security. Benefits include the end of large surprise write downs (hopefully) and therefore a restoration of confidence which should lead to a more liquidity and a (somewhat) normalized lending environment.

MightyJuice, I agree partially. But if there's a foreclosure the bank would be stuck with the property and maintenance on it, though any sale would be a gain. Benefits do indeed include the end of large surprise write-downs, but I think the whole lending industry is going to be restructured. See this from Bloomberg today:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a0CDlPeZkQO8&refer=home

From a lending perspective I think what you'll see is that people with good credit will keep on getting credit. The 3 key regulations currently being proposed for underwriting mortgages are 1) applicant will have to be able to afford the maximum reset at the time an ARM is taken out; 2) no more no-doc loans; 3) minimum down payments (amount TBD).

Securitizations, however, are a different animal. I don't think we know how they're going to work out, other than they won't be so opaque in the future. Ratings agencies will also have to be sorted out.

stevejhx, you seem more in touch with the numbers than I am, but reading the newspapers, I thought that much of the problem nationally is the owners simply can't refinance at those nice numbers you mention b/c their homes are worth less than the value of their original loan and lending standards are tighter than they were. So how can the portion of the $1.5 trillion do to reset that fits this category refinance at these nice numbers?

street_easy, that is part of the housing problem, and therein lies the credit crunch. Nobody knows has those data.

Great article in the NYT about Banks closing HELOC's on people with great credit in all areas of the country. IF anyone would like to review my past posts you will see I predicted this over a week ago. This is just another way that the credit problem will worsen over the next 12-18 months. This will cut off the revolving debt of millions of homeowners. They have already maxed out the credit cards and were using the HELOC to survive. Millions of people have literally been using their HELOC to pay the mortgage, groceries and gas. Now just imagine that this source of money no longer exists. What's the first thing that doesn't get paid. Yes, you guessed it the mortgage. So people ask why I think at times the sky is falling. This is one of the main reasons. These are the millions of home owners that have been hiding behind their HELOC's to cover their bills. Now not only are these homes going to almost double the foreclosures, but the secondary banks that hold these HELOC's are going to get hit a second time. Secondary banks get nothing until the primary mortage gets paid in full. Just think of the Billions in loses not yet factored in to "right down" equation. Once all the banks start to realize that people are using their HELOCs just to survive it will be a race against the clock to close them all ASAP.

If you are using your HELOC to pay your mortgage, groceries or gas there are only 2 ways this story ends.
(1) HELOC stays available and you max it out=Bank takes another $100,000 lose by Foreclosure
(2) HELOC closed= Bank loses $75,000 and house goes into foreclosure.

You guys see it? It's the Banks that lose the most. No one knows what the real damage is. The closing of the Helocs will force Millions of homes into foreclosure in the next 12 months. The lose for the banks will be staggering. People this is the perfect storm. Cash will be King when this goes into full swing and those with cash will make ton of money in the next decade.

"Millions of people have literally been using their HELOC to pay the mortgage, groceries and gas."

What do you base that on?

ccdevi- I know that it is hard for people to believe. It's just commen sense. In the last 5 years the price of essential needs have far out paced income. Many people as we all know bought way above their means. People start living on credit cards and when that runs dry they turn to what ever source they need to pay their bills. This is one of things that's more psychological in nature. It's a survival response. The theory is that if we hold on long enough we will be able to recover. Except you never can. Most of these forclosures are occuring without people even losing their jobs. They started out from day 1 not being able to pay the mortage in many cases. The people who have been using credit just to survive have not been counted as a lose as of yet. The reason is because the revolving debt allows them to stay off the radar of the traditional tools that track delinquent home owners. Once the credit dry's up all of these people will have no chance of recovery. The result will be much greater loses for the banks. The banks are not only going to lose what they loaned for the home but they are going to be holding the bag on the HELOC as well.Has anyone wondered why we have seen unpresidented moves by the FED. These are the things that they are worried about the most. No one can actually put a price on the lose. Bear Stearns is a drop in the bucket. The FED by opening the discount window to the investment banks was done for the same reason people use credit to survive. They have essentially told the Banks that we know that things are terrible and you would probably be going of business, however we will contiue to loan you money until you can recover. You see, the only thing difference between the home owner and the BANKS is that Fed has told the Banks that your credit won't run out. Banks with the help of the Fed are using revolving debt to survive. How long does this blank check last until the AMERICAN people say enough is enough. Who do you think is going to pay for this when it's all done. Yes, that's right JOHN Q tax payer.

Goldman, always the optimists:

March 17 (Bloomberg) -- Abby Joseph Cohen, the second-most bullish Wall Street strategist at the start of the year, was replaced by Goldman Sachs Group Inc. as the bank's chief forecaster for the U.S. stock market.

Cohen, 56, gave up the title of chief investment strategist and will no longer make predictions for the Standard & Poor's 500 Index in her new role as senior investment strategist, Goldman spokesman Ed Canaday said in an interview. David Kostin will make the calls as U.S. investment strategist.

Kostin, 44, said today he expects the benchmark index for U.S. stocks to fall 10 percent to 1,160 in the ``near term'' before rebounding to 1,380 by year's end. Cohen in December predicted the S&P 500 would reach 1,675 in 2008.

---

credit crisis in terms of seizing up of credit markets may be nearing an end. But use caution when equating that to mean economic recovery as the next step. Thats what I am finding. People think that when credit crisis is over, then stocks/housing etc.. will start to rise again.

Not so. Credit markets have been dysfunctional for 8 months now or so. It only took about 4 diff fed facilities, 300 basis points of easing, about $400 bln in fed injections, a bond insurer solution, a bear stearns bailout to get us out of this mess. And we are still NOT out fully yet, although signs have been pointing to easing of credit markets distress.

So, now we must see the economic damage done from this 8 month hurricane. Thats the disconnect. We are about to see damage to unemployment, gdp, corporate balance sheets + earnings, etc.. and stocks will react to this. Also, for most part, Int'l economies are about to enter their pain at the general 6-8 month lag from US; hence GE's earnings miss who is supposed to be this global powerhouse insulated from any US slowdown, as Immelt once said late in 2007.

This is def good news, dont get me wrong, but just use caution when equating the end of the credit crisis to mean the end of the overall slowdown!

urbandig- I agree with most of your analysis. Where we differ is the credit crisis. It may appear that we are seeing a bottom of the credit crisis, however it's a false bottom. My analysis is indicating that all is not disclosed. We will see this problem in the next several month's re-appear with the worst yet to come. I also strongly agree that the markets have little to do with the recovery of the housing market. The damage is done and will take years for a recovery. Just remember that all of the job loses/cuts have not even been felt yet. This will take month's before we start to see the effects of rising unemployment. I have been out of the market since Oct. and will only re-enter when the respected markets show a 20% drop. According to definition we haven't enterded a recession, 20% is bear market area. I find it hard to believe that in the worst credit crisis in this country's history we would't hit that 20%. Bear Stearns went under overnight. The fed had to break it's rules just to save a run on the bank. The is little left to save the economy at this point. These problrms have just got to work themselves out over time. Just my opinion based on indicators.

Oh almost forgot. Start paying more attention to Europe. It's beginning to feel the same pain. This will only contribute to the weakness of the US economy.

dco - you took my words right out of my mouth. I have mentioned this on Urbandigs blog too. If you think it only took 6 months for the market to bottom out, you are fooling yourself. A crisis like this will take a long time to unwind. I do expect additional 10% decline for major U.S indices and for International markets. We are already in a recession (started last December) and won't see any recovery until next year. I think Manhattan real estate market will fall hard after the usual summer busy season. especially those that are priced at $1500-$1600 psf. People looking to sell their condos for over $900 psf need to come down to earth. Prices will return back to mean (2004 levels). That's my humble prediction.

dco - agree! Thats why Im long EEV & FXP. We're on same page. Agree with manhattanguy too. We are about to enter the economic slowdown, job losses, and how can we expect housing to recover or securities tied to housing amidst a nasty recession.

Oh my gosh, somebody else agrees with me - manhattanguy! - & I swear it isn't me. 2004 prices. I don't think there'll be a "busy summer season" this year.

Wachovia gets a cash infusion, cuts dividends. Read today's Times' article on property prices in Europe. Exactly why it'll be foreigners to the rescue!

Except one thing to remember with the stock market: it's forward-looking. Usually prices rise toward the middle of a downturn. I believe we hit bottom in January - if the market didn't tank on BSC, it's pretty resilient. The worst was October of last year. My humble opinion.

But NYC is behind the curve on all of this, so what the rest of the country has been experiencing for some time now, we're just starting.

When The Zagats first mentioned selling their brand, they were talking about $200mm valuation, and that was just a few months ago.

How much do you think they'll get now? who's going to finance that deal?

Give me a break, "end of the credit crisis" may mean a gradual return to normal credit, but what we had last year was anything but normal.