Relentless Waves

Our winter vacations are usually near the ocean in some warm paradise somewhere. I love sitting on the beach and watching the waves roll in, the bigger, the better. All waves are not the same, but one thing is certain, they are relentless.

There have been waves of trouble in the housing industry as it relates to the banking business, as it relates to mortgages and credit. Everyone by now knows about sub-prime mortgages and the troubles they have caused. The first wave of problems came when those folks who did not deserve or could not afford a mortgage were given one anyway. When these loans came up for renewal, the undeserving homeowner could not make payments and defaulted on the mortgage.

The next wave of problems came from the speculators who purchased homes by leveraging themselves and when the value of the homes fell, they defaulted because the mortgages were worth more than the homes they had purchased on speculation and there were no buyers.

Now we are into the third wave of problems. These are the prime loans, or loans made to hard working and deserving people who bought homes with a high ratio mortgage but could make the payments. That is, until they started losing their jobs. With unemployment nudging 9%, there are a lot of these people out there. There are also a lot of people who are still working but their houses are 'under water' meaning their mortgages are worth more than their houses. Some are walking. This is indeed the biggest crisis right now. These are also the folks who were driving the spending engines that fueled the economy. They will not be spending like that again soon.
Yes, the waves are relentless and there are two more coming.

The 'jumbo prime' borrowers will soon be in trouble because they are the high rollers with the million dollar houses who are effected by economic downturn just like the rest of us. Many of these do not have deep pockets and will also walk.

The next wave will be defaults by commercial and business development that will go 'belly up'. It is inevitable as malls across the USA are already closing. These new malls were highly leveraged no differently than the average new house.

As if that were not enough, there is one more tier of sub-prime mortgages that are coming due in 2013.
If you thought the recession/depression** was in retreat, think again.

** Recession is a cyclical downturn in the economy. A depression is when there is a fundamental change in the economy. i.e. bailouts, monetizing the debt (printing new money to pay the national debt), huge bankruptcies such as Lehman Brothers and GM, and monumental government deficits that will take many generations to pay down.