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Posts Tagged ‘interest rate’

 

 

The bottom line is that we are in the eye of the storm right now and the foreclosure situation could potentially fall back into crisis mode.  Now, I think that we can handle it a little better this time around, however, this is a risk that no one is anticipating.  I guess the thought is that the Obama administration has this handled.  The truth is that we don’t have solutions for this problem. We only have ways to make the situation more tolerable. 

 

 

 

 

I have been writing over the past few days about what Wall Street is not really paying attention to right now.  I made the same argument back in late 2006 and early 2007 that there was a category 5 financial storm brewing and Wall Street is ignoring the risk.  Well, there is still yet another category 5 storm brewing. 

The storm consists of many components.  Yesterday, I wrote about unemployment.  Today, the root of the whole financial crisis could potentially be raising its ugly head again.  Now, I want to keep this very general so that you can see the risk. This is a discussion that can even get over my head at times. 

Let’s start at the beginning, where all of this started.  The mortgage industry became greedy and gave mortgages to millions of people who could not really afford them.  Upfront, these mortgages seemed affordable.  However, something very horrible happened and the interest rate and the payments changed.  The mortgage “re-set.” It changed in such a way that people could not afford to keep their homes.  They couldn’t refinance and the home went into foreclosure.

The foreclosure crisis is causing all of the problems.  So, in order to get past the credit crisis, we need to get past the foreclosure problem.  Well, unfortunately, between the second half of 2007 and 2008, hundreds of billions of dollars worth of these mortgages were re-set, causing countless numbers of people to lose their homes.  Then we had a slowdown in the number of re-sets. At this time, the re-sets are starting back up again.  Take a look at this chart:

mortgage-re-sets

You can see all of the green at the beginning of the chart.  That is the escalating number of mortgages that re-set.  Then you can see it died down again.  Well, different types of mortgages are facing re-sets.  Unfortunately, it appears to be a larger problem.  Look at how high that graph spikes!

The bottom line is that we are in the eye of the storm right now and the foreclosure situation could potentially fall back into crisis mode.  Now, I think that we can handle it a little better this time around, however, this is a risk that no one is anticipating.  I guess the thought is that the Obama administration has this handled.  The truth is that we don’t have solutions for this problem. We only have ways to make the situation more tolerable.

I don’t think we are out of the woods yet.  The determining factor is the foreclosure situation and it appears that we still have a ways to go. The good news is that we might get a fairly long period of time where things start to look better.  For those mortgages that go into foreclosure, it will take 6 months or so to work themselves into the system.

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Well, so far so good for the stock market (S&P 500).  The price decline stopped at a price level of 666 on Monday and is now at 729 (mid-morning Thursday).  Thus far today, the market is showing some follow through from the big day on Tuesday.    This is a pretty typical day following a day where the stock market went up over 6%.    The big key now will be the S&P 500 closing over the price level of 741. 

Although any positive news in the stock market is good news, there is a problem lurking in the background.  The credit markets are starting to deterioate again.  There is a key interest rate called the LIBOR rate.  Without getting to technical, the LIBOR rate is the rate banks charge when they lend money to one another.  A rising LIBOR rate is a real negative.  It basically suggests that  the risk level is rising causing banks to raise their lending rates.  This was at the heart of the problem last fall.  Thus, if this continues, it would be a real negative for the banking system and for the rest of the market.

So once again, we take this day by day.  The risk level is still extremely high.   

 

 

So the big

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