- Banks were warned exotic mortgages were often inappropriate for buyers with bad credit. Anyone surprised about that?
- Banks that bundled and sold mortgages were told to be sure investors know what they were buying. We know that's not true. AAA ratings were given to much of this debt that proved to be of much lower quality and much more risky.
- Regulators urged banks to help buyers make responsible decisions and clearly advise people that interest rates might skyrocket and huge payments might be due sooner than expected. Do you believe that mortgage brokers or banks clearly warned people about the dangers of the loans they were taking? I don't.
mortgage meltdown postsFeed
I've been writing about finance for longer than I care to admit (okay, 15 years, which feels like a long time, even if Floyd Norris might scoff). But one of the most surprising news flashes of my career has to be when I read in mid-November this year that E*Trade was tanking on concerns the company could go bankrupt.
E*Trade (NASDAQ: ETFC)? Bankrupt? I've seen discount brokerages come and go, but E*Trade has long been one of the survivors. It was up there, knocking on king Schwab's (SCHW) door, leaving competitor TD Ameritrade (AMTD) snapping at it heels. Or so I thought.
But it turns out that was the way things were before the mortgage market went bust. And before CEO Mitch Caplan decided to place a big bet on residential mortgages. Caplan, formerly head of a bank that E*Trade acquired, became CEO in 2002.
It may be too early to put a final price tag on the amount of money American homeowners will lose because of the mortgage meltdown. Lots of different people have tried to do just that. I've decided to use the numbers from the Congressional Joint Economic Committee report, "The Subprime Lending Crisis," because it draws from the best of many of the economic analysis reports available.
The conclusion of this report is that American homeowners will lose $103,041,748,445 in value due to the mortgage meltdown between Q3 2007 and Q4 2009. About $70.8 billion dollars of those losses will be in direct losses of homes (foreclosures) and $32.2 billion will be in loses of property values of the homes in the hard hit neighborhoods. State governments will lose about $917 million dollars in property taxes during this period. While the losses won't all be fully realized in 2007, the root of these losses will all have begun in 2007 when the mortgage crisis was fully recognized.
The five hardest hit states are California ($23.8 billion in losses), Florida (total losses $12.2 billion in losses), New York ($9.5 billion in losses), New Jersey ($6.4 billion in losses), and Illinois ($5.4 billion). These totals include the direct loses from foreclosures, the direct loses in property values to foreclosures, indirect loses to neighborhoods and losses in state property taxes.
People who own homes in the hardest hit areas will be facing these loses for years to come. Right now no one knows for certain when the glut of homes on the market will begin to clear, but many believe we really won't see a turnaround until sometime in 2009.
Lita Epstein has written more than 20 books including the Complete Idiot's Guide to the Federal Reserve and The 250 Questions You Should Ask to Avoid Foreclosure.
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Stories abound about how the Goldman Sachs Group (NYSE: GS) avoided the mortgage meltdown and generated $4 billion in profits on the bet that risky home loans would fall in value. That move was made by a small trading group, according to the Wall Street Journal.[subscription required] in the firm's mortgage department and it helped to offset the $1.5 billion to $2 billion in mortgage-related loses elsewhere in the firm. While most other financial institutions are losing big, Goldman expects to report a net annual income of more than $11 billion, according to today's Journal. They made lots of money selling those risky mortgage securities to unsuspecting clients.
That's great that Goldman called this mortgage meltdown early and I'm sure investors in Goldman's stock are very happy. But what about all the investors who took the advice of Goldman brokers to buy these risky mortgage-related securities? Why weren't they warned as well when the decision was made to dump the securities? Why should Goldman gain while its clients suffer?
Clearly someone needs to open an investigation into what kind of advice Goldman was giving its clients and how that advice differed from the actual trades Goldman was making. While buying Goldman's stock may be a good idea, it doesn't sound like being a Goldman client works well when the financial industry is facing a meltdown.
Lita Epstein has written more than 20 books including "Trading for Dummies" and "Reading Financial Reports for Dummies."
This post was part of AOL Money & Finance's Best & Worst of 2007 feature. The voting has now closed and readers have chosen the weak dollar and rising oil and gold prices as the money story of the year. Be sure to let us know in the comments if you are pleased with this result.
As we approach the end of 2007, we now have a really tough question to answer. What is the Money Story of 2007? What are the candidates?
The Boom and Bust in Private Equity Buyouts
As we entered 2007, no one could imagine the activity with private equity firms around the world. Private equity firms were supposed to be the new Masters of the Universe, ushering in a new Gilded Age not seen since 1920s. We saw this with the initial public offering of the Blackstone Group, the premiere private equity group. This was followed by a series of public and semi-public offerings by other organizations, such as Apollo Group.
However, the new Roaring '20s was relatively short-lived with the credit crunch. This caused most merger activity, including corporate buyouts, to come to grinding halt. Blackstone Group (NYSE: BX) now trades substantially below its high price. Who could guess that private equity would experience a boom and bust all in the same year? However, before you dismiss private equity as an element of the past, remember that most of these firms still have substantial cash available ready to invest when conditions are ripe.
This post was part of AOL Money & Finance's Best & Worst of 2007 feature. Voting has now closed and readers have chosen rising fuel prices as the most worrisome consumer trend. Be sure to let us know in the comments if you are pleased with this result.
The most Worrisome Consumer Trend of 2007 is ... whichever one you choose. The following is my analysis of four candidates -- ranging from can't sleep at night to minor complaint:
- China product recalls. 30 million Chinese products -- many of them toys -- have been recalled in the last several months. With the holiday shopping season in full swing, this has to be among the most worrisome consumer trends. It's not easy to find out if a product is made in China. This list of U.S. made toys might help, and this list of Made in America products might also be useful.
- Subprime and mortgage meltdown. The cost to society of the subprime mortgage meltdown could be as high as $4 trillion. Two million people are expected to lose their homes to foreclosure by the end of 2008. If you are one of these people, this trend is definitely costing you sleep. And since there's no way of knowing how widespread the damage will be, everyone in the world should be worrying about this one.
What surprised analysts was the degree to which incomes lifted in the month. July saw a 0.5% rise in income, which was the best move in the past four month.
While it is great to see spending on the rise, we should definitely be cautious to read too much into the July figures. Consumer confidence has been eroding in August, so do not be surprised if July's increases wind up being temporary as the mortgage meltdown has started to weigh in on every one's mind.