Wednesday, December 13, 2006

Alex S. Gabor

December 8, 2006
The inevitable is happening. After millions of fraudulent loan applications being processed, closed and then resold to unwary and unsuspecting foreign investors through U.S. government sponsored institutions such as Fannie Mae and Freddie Mac, and other major financial houses including banks, S&L’s and large publicly traded mortgage companies, foreign central banks are shying away from fueling further liquidity in the U.S. housing market which has impacted the value of the dollar while Europe and Britain raise or maintain their interest rates respectively to prevent global financial panic.

The Feds new chairman, Ben Bernanke is caught between a rock and a hard place. He is not instilling much foreign confidence with his recent remarks that the bottom of the housing market is near, echoed by Realtors, Builders and inside the industry paid economists and analysts.

Bernanke justifiably keeps harping on inflation fears but a raise in interest rates would only accelerate the collapsing mortgage industry in America. It may be the slipperiest slope facing the banking industry in American history.

Inflation fears are well founded as the dollar has lost over 15% of its purchasing power in 2006 against the Yen, Euro and British Pound, and 99.9999% since the Fed was incorporated in 1913.

A devalued dollar creates enormous inflation which is skewed by false government statistics on the jobless rate and other false economic news echoed by heads of publicly traded homebuilders whose nightmares are just beginning to see the light of day.

Public statements made by people whose vested conflicts of interest contradict facts surrounding the current shrinking demand for new homes, rising inventories, fewer new home permits, huge increases in initial default notices, rising mortgage company failures and over 110,000 homes around the nation currently in foreclosure with no end in sight.

One analyst predicts that by the end of 2007 there will be over a million foreclosures and unsold housing inventory on the market and an increasing wave of new personal bankruptcies setting new all time records.

British, Japanese, European and Chinese bankers are not standing around scratching their heads as news of Fannie Mae’s $6 billion restatement of earnings was recently announced. They already knew it was coming, they just didn’t know exactly when.

They have been quietly selling off dollar reserves for the past year knowing that America’s economy was being fueled by an artificially inflated housing boom led by Greenspans’ watch which ended last February.

We won’t know how bad Fannie Mae is doing for several more years, a fact that is obfuscated by relaxed rules being made in its’ favor – under New York Stock Exchange financial reporting rules Fannie should have been delisted several years ago - but now won’t have its’ 2005 results until September 2007 according to its Chairman Daniel Mudd.

London based Hong Kong Shanghai Banks’ (HSBC) Finance Director Douglas Flint, who works for the third largest bank in the world, says “data coming in shows signs of weakening in loan portfolios in North America”.

That means that banks will need to increase their reserve capital requirements in 2007, adding further tightening to lending conditions, which in turn will domino the real estate market, spilling over into commercial transactions.

HSBC generated 31% of its global profits from home loans last year but is experiencing 65% of its’ bad loans this year from the same market. The actual numbers will not arrive for another 30 to 60 days as almost every bank in the country has experienced major drops in loan originations and increased defaults but won’t report their total financial results until January of 2007.

H&R Block has put its’ Option One mortgage unit up for sale with no real buyers in sight because it is hemorrhaging from a 40% drop in sales, a $39 million second quarter loss, and has shuttered a dozen offices around the nation.

This past week, once high flying Ownit Mortgage Solutions announced it has completely closed down all its operations, putting more than 700 people out of work, and costing investors more than $50 million in equity.

Ownit, headquartered in California, was jointly owned by Merrill Lynch and a private equity group led by Bill Dallas, once boasted of how it was one of the 15th largest lenders to homedebtors (anyone with a mortgage doesn’t really own their homes so they should not be falsely labeled “homeowners”) grew at an unusually high rate of 800% during just two years when its loan originations increased from $1 billion a year to over $8 billion in 2005.

In 2005, Bill Dallas was quoted as saying, "Underwriting guidelines developed in the 1950s don't address the needs of today's homebuyers and brokers, loans that met the needs of Ozzie and Harriet were not intended to fill the needs of Desperate Housewives."

Calls from the media and regulators to Dallas’ offices in Agoura Hills, California were being referred to his lawyers as 50,000 square feet of office space at the company headquarters may soon be found empty.

Another company in Texas, Sebring Capital Partners, shut its doors this week and more than 350 people are out of work there. The number of people in the real estate industry, including home construction, real estate lenders and brokers, who are seeing their incomes evaporate has quadrupled in the last nine months. Most of those people have mortgages.

Atlanta-based NetBank last month closed its subprime lending unit and transferred most of its employees to another company. Key Corp. is trying to sell its subprime Champion Mortgage business without much success.

Many people in the industry cannot claim unemployment because they were on commission only jobs. Many of them were treated as self employed or independent contractors thus they are not reflected in the real unemployment numbers.

They may not even show up in poverty statistics but many are slowly going broke if not broken already. Some may not be able to file bankruptcy because they cannot afford it. The average cost of filing bankruptcy through an attorney is around $1,500 nationally.

If collection agencies don’t collect money after four years on debts owed, Federal law precludes any further obligation to pay, so most of the fallout from this wave will last at least another four to five years as the credit scores of those caught up in the mess preclude them from jumping back into the game any time soon.

So far very few mortgage brokers or fraudulent borrowers have gone to jail relative to the multi-trillion dollar fraud foisted upon the market over the past several years. The FBI says they don’t have the manpower.

Many realtors who got caught up in the game wound up owning two or more rental properties and are now struggling to make their own mortgage payments, as rents in some areas are being raised in an attempt to cover higher mortgage payments, forcing tenants to find cheaper housing elsewhere, a harbinger of even greater default and foreclosure volumes.

According to European bankers at Union Bank of Switzerland, default rates on home mortgages in America have doubled in the last two quarters, while liquidity in the secondary market is shrinking due to higher investor concerns about credit and loan quality.

Large institutional hedge funds and global investors are bracing for what is probably going to be the biggest drop in real estate values in the history of the world as more than $5 trillion is lopped off the hyper inflated froth of the home lending and mortgage industry.

That $5 trillion evaporation into thin air of value which was created out of thin air in the first place includes home equity that may make the amount owed on homes, particularly those that were financed with 100% loans, more than the present market values. It also includes lower stock prices on mortgage banking companies, builders, escrow companies, title companies and all real estate industry related publicly traded stocks.

Where these savvy investors are now playing with other people’s money is in the stocks of troubled industry related companies. Shorting home builders has generated billions in profits for large groups of hedge fund investors managed by smart money managers.

One analyst, who predicts we may see several $50 billion dollar deals next year says the only thing that can fuel any growth in stocks and equities on Wall Street is increased lending by commercial banks to private equity groups which may lead to record leveraged buyouts in 2007.

There is now more than $1 trillion invested in private equity hedge funds operating from tax free havens around the world. They are eagerly awaiting more fallout in the real estate sector and have their bets very well hedged said another hedge fund analyst.

To the keen eye, these forms of economic development are just more smoke and mirrors in a real estate market that is cratering.

Another analyst says that in 2007 we are going to see at least two large publicly traded homebuilders file bankruptcy as their credit lines are cut off by major banks, and two others will merge just to survive the downturn.

One retired old time mortgage broker who has criticized his modern peers over the past few years has indicated that some public prosecutors are beginning to take notice of increasing default rates and lenders are being more scrupulous when it comes to verifying information on borrowers loan applications because of the rising rates of default on such loan programs as 100% stated income, stated asset loans.

“The Fed has been trying to do away with these types of loans for years but doesn’t want to send the market into shock and awe.”

“They are either going to put the screws to the borrower for United States Code violations, or they are going to get the borrowers to turn in the brokers and bankers who put them into loans they really didn’t qualify for in the first place.” It would appear that new waves of prosecutions are on the near horizon.

An increasing number of lenders are being forced to ask borrowers who have now defaulted how their incomes could have plummeted so rapidly after refinancing which allowed them to live off the cash they borrowed on the equity in their homes.

One smug mortgage broker in Woodland Hills, California was quoted as saying, “they can’t touch me, the borrower’s are the one’s that signed the loan applications, none of my contracts with lenders require that I buy back loans from them if they default or if they later discover fraud”.

With revelations resulting from recent studies showing that 2% of the worlds population owns 50% of its assets, that 12% of the population or 36 million Americans are living in poverty, with huge increases in houseless people migrating to suburbia, it appears that the building, mortgage lending and banking industries have saturated the market with over inflated properties and their monopoly games are about to be put on the shelf, at least until all the dust settles, and those without “get out of jail free” cards are brought to justice.

Alex S. Gabor is the author of “Bonanza – Profiting During the Real Estate Depression – How to Make a Killing During the Real Estate Bust”, an electronic book being readied for release in 2007. He is a freelance writer living in Hollywood. He spent 25 years investigating and working in the mortgage banking industry and is the inventor of zero interest mortgages. He is a major proponent of changing the current tax laws to eliminate mortgage interest deductions and replace them with principal reduction credits to encourage debt free home ownership and affordable housing.

Copyright © 2006 by Alex S. Gabor. All Rights Reserved.