Tomorrow, America’s great middle class will celebrate in a great middle class way – with picnics, crab feasts, and outdoor barbeques.
The conversation is likely to turn to housing. But unlike the sunny July 4th holiday discussions of recent yesteryears, tomorrow’s beery dialogues may be a bit overcast.
The United States is suffering the worst slump in the housing market since the ’30s, say the news accounts. How bad is it, really? That’s hard to say. The national statistics show a modest decline in prices – or even an increase, in some areas – with mounting inventories of unsold houses. In Las Vegas, the number of resold houses in May this year dropped by 28% from last year.
The wheels of Financial Fate may grind slowly…but they grind exceedingly fine. And America’s middle class is beginning to notice.
“Home values and the US$6 trillion US mortgage-backed securities market are locked in a downward spiral,” reports Bloomberg.
Bloomberg describes where the abstract – such as CDO pricing – hits the concrete – such as the cracked stone driveway.
“Bear Stearns is bailing out one money-losing hedge fund it controls and leaving another to liquidation by creditors. Both funds invested in securities backed by subprime loans. The loans, for borrowers with bad or limited credit histories, are secured by houses such as the one on Lilac Lane [in Decatur, Georgia].
“Bear Stearns took possession of the three-bedroom Lilac Lane house for US$76,500 on March 6, according to the foreclosure deed. The owner who defaulted had purchased the house in April 2005 for US$160,000 using a subprime loan that required no money down. He had been renting it out, according to the neighbor.”
The local mortgage lender went bankrupt…the house was repossessed and sold for half the previous price. Then, rented out, its condition deteriorated. The paint flaked off. The concrete cracked. Possums moved in to the backyard.
And now, the proud owner is Bear Stearns (NYSE:BSC). The second biggest underwriter of mortgage-backed securities in the United States is rapidly becoming also a major owner of split-levels, neo-colonials, and Spanish-style bungalows.
“Bear Stearns and its affiliates are listed as buyers of at least 53 homes so far this year in San Diego County, California, 48 in Maricopa County, Arizona, and 40 in Cuyahoga County, Ohio, according to a search of property records.
“JPMorgan, the third-largest US bank, and its subsidiary Chase Home Lending acquired at least 194 homes this year through foreclosure in Wayne County, Michigan. Merrill, the third-biggest securities firm by market value, and its mortgage unit, First Franklin, took possession of at least 87 homes this year in San Diego County, California. Citigroup and affiliates are the new owners of at least 47 homes in Clark County, Nevada.
“‘Our expertise is in lending money to people to buy homes, it’s not in owning homes,’ said Chase Home Lending spokesman Thomas Kelly.”
What’s Bear Stearns going to do with the places? It can let Mr Market do his work – putting the houses on the market and accepting whatever price he gives. But if it sells, it risks depressing prices of other homes in the area – many of which it owns! What’s worse, “it will have a decimating effect on the mortgage-backed securities market when lenders start facing the music and letting property go at whatever price people will pay,” says a local lender. But what did Bear Stearns expect? When its collateral goes down in price, so do the financial abstractions that rested upon them.
On the other hand, lenders can turn their backs to the music. But the music keeps playing. That is what the neighbours are likely to be talking about tomorrow: the possums…the cracks…and the predicament in which Bear Stearns finds itself. It can sell…or it can hold on, maintain, and try to rent. But whichever way it goes, woe awaits.
Faced with a similar situation in its sophisticated hedge funds, Bear Stearns decided not to let Mr Market have his say…at least, not just yet. Rather than mark its portfolio of CDOs to market – by staging an auction of the assets in its troubled hedge funds – the company thought it best to keep things under tight control…putting off the day of reckoning, hoping that conditions in the CDO market might improve.
Then again, with so many people thinking the same thing, how likely is it that it will work out for them all?
Markets and Money