Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Emerging Bubble Alert: "Zero-down" loans to "credit challenged" applicants are on the rise

Stock-Markets / Liquidity Bubble Jan 07, 2011 - 08:03 AM GMT

By: Mike_Whitney

Stock-Markets

Best Financial Markets Analysis ArticleCounterfeiting is an effective way to stimulate the economy, but the costs can be quite high.  For example, if trillions of dollars in fake cash was injected into the financial system (undetected),   we'd probably see the same type of thing that we see when a credit bubble is inflating; asset prices would rise, unemployment would fall, economic activity would increase, and GDP would soar.  But when people figured out what was going on, investors would panic, the markets would crash, and the economy would go into a deflationary nosedive.


   So here's the point: Deregulation allows the banks to create as much bogus money as they want in the form of credit. When a bank issues a loan to someone who can't repay the debt, it's counterfeiting, which is the same as stealing. This is what the banks did in the lead-up to the Market Meltdown of '08; they issued trillions of dollars of mortgages to people who had no job, no income, no collateral, and a bad credit history. The banks abandoned all the standard criteria for issuing loans, so they could increase the quantity of loans they produced. Why? Because bankers get paid on the front-end of the transaction, which means that when they make a loan, they mark it as a credit on their books so they can draw a hefty salary and a fat bonus at the end of the year. In other words, there are powerful incentives for bankers to do the wrong thing, which is why they act the way they do.

Now that the economy has begun to stabilize, there are signs that the whole process is starting over again and another bubble is already emerging.   Check out this clip from an article in The Tennessean titled "Auto lenders approve more subprime borrowers":

"As the auto industry continues to make a slow recovery from tough times of the past two years, lenders are finally loosening credit restrictions and approving car loans for customers with less than prime credit ratings.  In the third quarter last year, for instance, the share of new vehicle loans to "credit-challenged" consumers rose 12.7 percent compared with the same period in 2009, said Experian, one of the nation's major credit reporting agencies.

Loans to borrowers with subprime credit scores as low as 550 were among categories that grew the most....Credit restrictions were the biggest reason people stopped buying new cars during the recession, but "that's not a problem anymore," said Marty Horn, sales manager at Nashville's Crown Ford.

"We're not having any trouble finding financing for anyone with a score in the 600s," he said. "We can get most people financed through Ford Credit, and if that's not available, we have other lenders ready to step in."...

"We're seeing loans of up to 140 percent of value from some lenders, and Capital One is by far our best lender for the subprime customer, which is below a 620 score," said Michael Creque, general manager of Alexander Chevrolet-Cadillac in Murfreesboro." ("Auto lenders approve more subprime borrowers", The Tennessean)

Can you believe it? Auto finance companies are lending up to "140 percent of value" of the loan to "credit-challenged" consumers? And this is going on just two years after the biggest meltdown since the Great Depression.

Keep in mind, that the housing/credit bubble cost ordinary working people $12 trillion in lost retirement savings and home equity while the perpetrators on Wall Street have seen their profits skyrocket. Bubblenomics is not "innovation" and it certainly does not increase productivity. It merely transfers wealth from one class to another via credit manipulation.

Consider the recent reports about improvements in the economy. While it's true the data is looking better (retail sales, personal consumption, manufacturing, car sales etc) it's also true that the credit cancer is spreading again. Consumer demand is still weak because unemployment is nearly 10 percent and wages remain flat. So the only reason spending is up, is because credit is expanding.  But that means more lending to people who are incapable of repaying their loans which will inevitably lead to another bust. Here's an excerpt from an article titled "Zero-down mortgages endure in rural areas" from bankrate.com which proves my point:

"The zero-down mortgage is still alive in the form of the USDA home loan....People buy houses without down payments or mortgage insurance under the Department of Agriculture's rural development housing program. The catch? The property must be in a designated rural area. The surprise? Some eligible properties are in places that most people would not consider rural....

The borrower pays an upfront guarantee fee of 3.5 percent of the loan amount, which most opt to roll into the loan. Under some first-time buyer programs, borrowers can have their closing costs paid....Unlike most low or no-down-payment loans, Defngin points out, USDA loans do not require mortgage insurance...... USDA does not set a minimum credit score, and lender minimums vary." (bankrate.com)

So a mortgage applicant can purchase a home with no down payment, no mortgage insurance, and no minimum credit score from the USDA? What the heck is the USDA even doing in the real estate business? This is just a sneaky way of creating another asset bubble. It's just more counterfeiting.

Now take a look at this from torquenews.com. Same thing. It shows that the big auto manufacturers are jumping on board the credit bandwagon, too. Here's a clip:

"Major auto makers and dealers will start the day after Christmas by pushing their zero percent down deals and hopes toward more year-end car sales....TorqueNews' screening of five top U.S. and Japanese automakers' year-end offerings shows all of them having some type of zero down deals to attract more car shoppers....

The U.S. luxury automobiles are offered with zero down year-end sales deals. All of the GM's products on its website are offered at with zero percent down-payment. GMC has no monthly payment until spring and $1,500 total allowance if the shopper finances with Ally. The 0% APR apply to qualified buyers on any GMC...." (torquenews.com)

"Zero down"; Weeee! "No monthly payment until spring", Weeeee! "$1,500 total allowance if the shopper finances" with us; Weeeee! Free money, never pay, borrow your way to prosperity; Weeeeeeeeeeee!

Haven't we seen this movie before? Is Congress really so lazy and corrupt that they're willing to let the economy drop back into the shi**er just so some shifty bankster can buy a few more baubles at Tiffanys?


Then there's this from yesterday's news: Allstate vs. Bank of America. Allstate wants to get its money back from B of A on toxic mortgage-backed securities. Here's the drift from the LA Times:

"The case pits insurer Allstate against Bank of America and Countrywide, the giant mortgage lender that Bank of America bought in 2008. The suit claims that Countrywide misrepresented the risks posed by the bundles of mortgages it sold to investors such as Allstate, which sank $700 million into the securities from 2005 to 2007. After the housing bubble burst, the mortgages in those securities started defaulting at a torrid pace, causing the value of the securities to plummet.

..... A Bank of America spokesman suggested that Allstate was "a sophisticated investor....looking for someone to blame." But Allstate's examination of a sample of the mortgages in each bundle found that Countrywide's disclosures consistently understated such important indicators as the percentage of mortgages with low down payments or with no proof of the borrower's income (so-called liar loans). And by Allstate's analysis, Countrywide's disclosures weren't off by a little bit. For example, in 11 securities that were supposedly free of "underwater" mortgages, up to 14% of the loans turned out to be larger than the value of the house." ("Housing Shocks", editorial, Los Angeles Times)

The "sophisticated investor" defense is an excuse that fraudsters use when they've just ripped you off. They say, "I thought you were smarter than that. I thought you were a "sophisticated investor."...which just dumps a little salt in the wound. 

The truth is, Countrywide clipped Allstate for $700 million in garbage loans and now claims that it procured the money "fair and square". Right. But they do have a point. In a system where there are no rules, anything goes. Allstate might lose their suit simply because the laws now mainly protect the interests of the predators rather than the victims. The banks are free to whip-up their junk debt-instruments (comprised of liar's loans etc) and peddle them to anyone who is gullible enough to invest their money. It's a con-game.

One last example. Many people have noticed that there was a slight uptick in credit in the Fed's latest report. That's good, right? But, as it turns out, the only area where credit really improved was student loans which grew about 80% year-over-year, or roughly $120 billion. So why the sudden and explosive growth in student loans? The answer appeared on an economics blog called benzinga.com via firedoglake. Here's an excerpt:

"The Federal Family Education Loan program (FFEL) allows private financial institutions to provide students with loans, but the government assumes the risk of default, and pays the financial fees while the student attends college. This amounts to privatized gains combined with socialized loans....

Under the FFEL program, financial institutions like Sallie Mae, Bank of America, National Education Loan Network, JPMorgan Chase, Wachovia, and Wells Fargo would originate these FFEL loans with students, and then sell them on the secondary credit market. In 2008, the credit market dried up, and the private lenders had nowhere to sell these government guaranteed loans. So, the government stepped in to buy up these loans and protect a program that was already a massively wasteful corporate boondoggle.

The bailout was authorized with HR 5715 Ensuring Continued Access to Student Loans Act (ECASLA). The bill allowed for the Department of Eduction to produce three different programs, the Loan Purchase Commitment Program, the Loan Participation Purchase Program, and a buyer-of-last-resort Asset-Backed Commercial Paper Conduit.

This purchase program — which amounted to the department of education buying privately-originated student loans that were intended to be securitized but now could not be — was radically expanded in 2009 and 2010, with a purchase amount target of about (you guessed it) $120bn. ("The hidden message of the consumer credit release" )

So, there is no improvement in credit. Not really. It's just more backdoor bailouts that are dolled up to look like things are getting better. But things aren't getting better; we've simply restored the same crisis-prone wholesale credit system ("shadow banking") with trillions of dollars of government subsidies, bailouts, stimulus and guarantees, and now we are speeding towards the next big collision. That's not what I'd call "economic recovery". I'd call it stupidity.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

© 2010 Copyright Mike Whitney - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Mike Whitney Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in