Friday, March 17, 2006

Totally Unconnected

The Mortgage Bankers Association expects mortgage originations to drop off by 20% this year, and it says refinancing should fall by 40%.

"Too many consumers have been attracted to products by the seductive prospect of low minimum payments that delay the day of reckoning, but often make ultimate repayment of growing principal far more difficult." Speaking was U.S. Comptroller of the Currency John C. Dugan, and what he was speaking of, specifically, was the way in which consumers took out interest-only or negative amortization mortgages. "In the last two years" Dugan continued, "we have seen a spike in the volume of payment-option ARMs, which are no longer confined to well-heeled borrowers who can clearly afford them. Increasingly, they are being marketed as 'affordability products' to borrowers who appear to be counting on the fixed period of exceptionally low minimum payments - typically lasting for the first five years of the loan - as the primary way to afford the large mortgages necessary to buy homes in many housing markets across the country."

We already know what will happen. We see the signs before us. Foreclosures are rising. Households which bought more house than they could really afford are going broke. Consumer spending has become a little wobbly. The expected effects on the housing market itself are starting to show up. Sales of homes are down. Inventories are rising.
In California, the housing boom has raised prices to the point where the median wage earner in L.A. County can only afford one out of every 35 properties on the market. We wonder who, then, will buy the other 34?
Other people are beginning to wonder, too. Transactions in January fell 24% from the year before.

Speaking of prices, "I would expect a general decline of 5% to 10% throughout the country, some areas 20%...and in areas where you have had heavy speculation, you could have 30%," says Angelo R. Mozilo - a man who ought to know. Mr. Mozilo is the CEO of the nation's largest mortgage lender, Countrywide. While we have no reason to doubt Mozilo's words on the subject, it is his actions that we'd bet on.
According to Grant's Interest Rate Observer, Mozillo "has been a steady and heavy seller of Countrywide common stock for two years."

Fully 40% of the job growth since 2001 is said to be the fruit of the housing boom...

~ Bill Bonner

A copy of Humberto Ortega's history of the Sandinista revolution was sent
to us by a friend from Managua. Humberto Ortega, along with his brother
Daniel, was a leader of the Sandinistas.

Senor Ortega begins by giving us a history of Nicaragua and the role
played in it by his own family. The impulse to improve the world, we
notice, may be genetic. Ortega, the elder, was also an activist and an
admirer of Madame Blavatsky, the Russian émigré to the United States who
founded the Theosophical Society. He was also a supporter of the original
Sandinista, Augusto C. Sandino, who had begun a revolutionary movement in
the '20s and 30s. Sandino's goal was to get the U.S. marines, who had been
sent to meddle in Nicaraguan affairs by William Howard Taft, out of the
country. Sandino figured the country would be better off without them.
Others figured the country would be better off without Sandino, so they
killed him. And then, the policia put Ortega in jail when they realized he
was a Sandino supporter. "I long to be at your side and fight for our
country, liberty and national honor," Ortega senior had written to

We read Ortega's history with a mixture of boredom and despair. It is a
long recitation of people making remarkably naïve and idiotic decisions
that had predictably preposterous and disastrous consequences in the
course of a long war of terror. But most of all, it is the story of a
frightfully tedious revolution. Ortega tells of many trips back and forth
to Cuba, endless meetings and rendezvous, and long periods spent in jail.

Even though by the 1970s Marxism was already démodé as a model for
democratic liberation, the brothers Ortega and their fellow world
improvers still traveled around the world - taking advice and arms from Ho
Chi Minh, Che Guevara and other homicidal dreamers.

At first, the Sandinistas organized a war of terror against the Somoza
regime. Somoza may have been a pig, but according to Ortega's account, his
regime was - like the Tsarist regime overturned by the Bolsheviks -
surprisingly restrained in its treatment of potential revolutionaries.
Humberto Ortega must not have been a very good revolutionary. He was
always getting arrested. Yet, somehow, he always regained his liberty and
went back to work trying to undermine the government that let him get
away. Stalin wouldn't make the same mistake. His enemies never got a
second chance. By some accounts, the Ortega's enemies didn't either. After
the wars were over, as many as 14,000 cases of torture and murder by the
Sandinista police forces were alleged. [...]

Nicaragua was richer per capita than Costa Rica before the terror wars began.
When they were over, it was the poorest country in Latin America.

~ Bill Bonner


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