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nuf2bdangrus (< 20)

Bankruptcies in the pipeline....what does it mean for the future? 6 case studies for your consideration

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December 13, 2008 – Comments (19)

Many of you know I work for a major bank.  I'd like to post for dicsussion what I am seeing that I don't think has made the radar of the market, because its now yet showing in the stats.  A number of people that still show strong credit bureau scores that are negatively cash flowing and choked with debt and unsellable assetts.   I posted about it before....but I'm going to add some case studies, for all to consider what the financial and social ramifications are for our future and the markets.  I think they are profound.

 

Stories from just this week.  Names, certain facts, geographies and sexes have been changed enough to disguise the individuals for privacy.


We will call the first one Mr Big.  Mr big is 61, and just lost his job, with no hope of finding another.  He moved here for retirement 2 years ago, but like so many of those that do, they moved on the premise that they can find some work to supplelent their retirement income.  Mr B  is negatively cash flowing by about 2k per month.  His savings is exhausted. He has no stocks. He can collect ss in 1 year, and he has already run up 45k in credit card debt.  He has about 10k on revolving credit he can still borrow, and he no doubt will.  I can't refinance his mortgage, because there is no lendable equity.  Even if he goes 90 days late and goes to "hope now", cutting his mortgage by 1 or 2% won't address the underlying problem.  There is 45k of credit card debt not yet on the radar that I see no hope of being paid. Credit scores still good.  BK is inevitable in 2009. Inevitable.

 

 

Next is Mr & Mrs double.  They have a house in another city, and moved here to find better paying work, as they couldn't make ends meet there. They bought a house at the top before they moved with an 80/20 mortgage in the other city, via an automatic underwriting FNMA desktop loan.  They couldn't sell their house in  the other city, becasue they owe more than it is worth, so they put it up for rent.  A year ago. It's still empty. They started running credit card debt up to about 40k, the last 20 of it paying the mortgage.  They are at 105% loan to value.  Even if they go 90 days, "hope now" won't help them because its not their primary residence.  Even if they could, a cut of 1-3% would not help them. Too much debtl   BK in inevitable in the next 90 days.  Total loss.  45k credit cards.  60k on foreclosure.  That's over 100k.  And they have large student loans that they can't use BK to avoid.  Think they'll be big spenders anytime soon?

 

Now lets go to Mr Ret.  Mr & Mrs Ret got caught up in the development lot loan bubble that went on here, where they went to a "tent event" and got a 3 year interest only loan, put 10% down, and then got the 10% back as a kickback from the seller to make the first years payments. By the way, over 2-3 BILLION dollars for those type loans were made by several banks in this area.  Banks were falling over themselves to get in on the act.  This was supposed to be a "customer gets the savings by buying direct" deal....(hint-by the time real estate "investing' comes to this, the money has already been made)  Their time horizon was 3 years to make a nice profit.  Of course,  you know the story.  The loan balloon has come.  The lot is worth 30% LESS than what they paid.  The bank will do a workout with them, and give them 3 more years.  But as Mr & MrsRet are on a fixed income, and they have little savings, they see the writing on the wall, and are going to file for BK.  There is no leveraged debt on their credit bureau, and their scores are high, thus they're not showing on the risk profiles yet.  But they're toast.  I know of hundreds of folks who have these "investments' who are struggling. Think they'll be going back to a consumer spending economy?

 

Moving on to Mr Blider.  Mr Blider sells a unique home product that can allow the buyer to save some money when they buy a home.  On paper.  But it never seems to work in reality.  Mr Blider used the appreciating equity in his private residence to finance the business growth.  High credit scores, because every 2 years he was able to use the leverage to meet growth needs and continue to finance personal consumption.   In the best of times, Mr Blider obtained several personal and business unsecured lines of credit, and the lenders were all too willing to provide.   In addition, Mr Blider bought some of those spec lots above using stated income loans with the intent of selling his product as spec on them.  In 2006, things started to slow a bit, and in 2007 they slowed even more.  But Mr B was always able to make payroll and pay his personal debt by using the unsecured lines of credit. And the trips kept on happening. By late 2008, Mr B has over 4.5 mm in personal and business debt, supported by about 2 mm in marketable real estate.  Down to a last 30k credit line he didn'teven know he had, he's going to draw on that one in a last desperate attempt to stay the course, despite the fact that the writing is on the wall. That bank doesn't see the problem in their screens to know to close the line because his credit score is still 750. They're about to lose 30k. When Mr & Mrs Blider fail, and they will, it will be devastating, as they will lose everything, bcause their business income pays their personal mortgages, which are way beyond anything they can support "if" they can find work.  Thus, the is no hope, even in "hope now".  The income will never be there.  Mr Blider is looking more and more haggard, and his wife is in denial.  With zero retirement savings, and in their mid 50's, retirement is going to be a sad affair for them.  Total debt 4+mm.  In the best of times, they made 6 figues plus.  I see 50k combined for them in regular jobs on the other end, he in outside sales and she as a secretary.  No happy days here.   No retirement savings (i.e. 401)  How much will they be spending?

 

On to Mr & Mrs Ostrichi.  Mr & Mrs Ostrichi are both self employed.  They work in a home based business, and have good credit scores.  They used a small inheritance to buy a house with a "negative am" loan, which allows you to make less than interest payments, accumulating principal.  For 2years I suggested they refinance to a conventional fixed, but they don't have the verifiable income to do so.  Worse, they bought 2 development lots with the same program as listed above, and both loans are in renegoatiation. They have some credit card debt, and are about to accumulate more, as a means to meet ongoing expenses.  By now, you can probably see where this is going.  Without help from family, which may exist, they are toast.  Even with the help, I don't forsee them ever having equity in their home.  They neg am'd that at the top.  I estimate they are 50k upside down.  Thus, a best case scenario is a white knight relative bails them out of the land loans and credit cards, but they are still negatively cash flowing and have negative equity.  They certainly won't be buying new cars or other goods to stimulate the economy any time soon!  And they have no retirement.

 

Onward to Mr & Mrs Loonie.  Mr & Mrs Loony are also in the 2 house trap, as in the boom they saw a house a couple of hundred miles to the north and bought in while under construction, putting a good amount of cash down.  They figured it would be no problem to sell their house.  Worse, they had a nice pile of cash, but instead of putting it all on one of the homes, they fell into the spec trap and bought spec land in one of the 5 worst sunbelt states they could have.  That land is now selling for 20 cents on the dollar.  They have 2 mortgages, and are out of cash.  The lender won't do a refinance, because there is no equity on the home in question.  If they do a deed in lieu of foreclosure, the lender will put a lein on their other house, ensuring them to be in negative equity and negative cash flow forever.  As they are retired on fixed income, they won't be adding to the consumer economy.  It was reasonable to assume one of their houses would sell, after all they live in a mild climate with lots of retirees.  But having lost a third of its value, and due to lose more, there are no buyers, as there is still oversupply.  "hope now" can do nothing for them.  They went from a one house with a modest mortgage and cash in the bank tobankrupt.  Oh, no retirement savings either.

 

Those are 6 stories out of probably 20 that I have seen in the last 60-90 days.  What they all have in common, with the rest of them is this:  None of these people have any hope of a bailout.  They don't qualify.  All of them still have good credit scores, and thus they are under the radar of "problem loans".  Most if not all of them will use unsecured lines of credit to forestall the inevitable, meaning the losses will be larger when they occur.

 

Some of these people I know well, others I just handled the situation.  But they are not unique, as they all have underlying the same problem....they were taught to use debt to leverage assetts, as debt was cheap and assetts appreciated faster than the debt.  They felt wealthy, so they kept spending, and saved little to none, as savings was a low priority. They had housing wealth. They went on trips, ate out, and bought what they wanted. Those that had stocks have long lost them to the market or withdrawls.  There is nothing anybody can do to save them. TARP money that sits in bank vaults as government equity will never make it to them, because it can't and it shouldnt.  There is only one solution, and that is for the inevitable failure to occur, the losses be taken, and they try to rehabilitate their lives.  As most of them are 50-60 yrs old, their retirements are unfunded, and they will be funcationally dependant on what little income from social security and part time work they can obtain.  In essence, they are the epitome of the baby boom generation, that overborrowed, underfunded their savings, and overconsumed.  They relied on the wealth effect of ever increasing asset values, not INCOME, to finance their consumption.  Iforesee reduced consumption from them for the rest of their lives.

 

With rampant deflation and delevering, they find themselves trapped.  They often feel misled,as if their quagmire is for circumstances beyond their control, and many act like victims- but I argue that it was more cultural, and they were fully a part of it.  For each one of these I posted, there are many more with many other banks in this area.....people that I define as "under the radar screen".  Beyond the immediate credit losses, which will be huge, is the heretofore unrecognised fact that their spending and savings patterns from now will be substantially different than before.  After bankruptcy, they will spend less and save more.  They have no choice.  And they and we shall be better off for it. But their lives will be sparse.  And they will be renters. But don't look for the 25 year trend of conspicuous consumption from them to continue.  No vacations, no revolving new cars. It's over.  Times millions.  And there is nothing the Fed Or Treasury can or should do about it.  But Fed & Treasury are somewhat resposible, because they forced artificially cheap money into the system, which in part provided the rationale for the takes of the cheap money.

 

After the failures, millions of the younger ones will be forced to obtain new skills, and change their consumption. The older ones best days are behind them.  Isn't that what happened in the great depression?  And weren't we better off for it?

19 Comments – Post Your Own

#1) On December 13, 2008 at 5:14 PM, cubanstockpicker (21.13) wrote:

sounds like you got a horrible pipeline. I left the mortgage industry in 2007 and shorted most related banks for a while. One of the problems I see is how the government considers debt. If the people who are suppose to be the most well positioned cant afford their homes then how about everyone that is not. This persitent problem cant go away by throwing money at it and trying to hippocritically cvhange the loan terms by 2% for the sake of the homeowner. LOL, Banks are happy because they can resell that loan and get the top value of a government backing, when in all honesty the bank was the one who did the 80/20 or subprime or arm loan should be taking a WAY BIGGER HIT. There will be a new wave of foreclosures because of a badly controlled bailout plan.

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#2) On December 13, 2008 at 7:48 PM, Gingerbreadman55 (26.05) wrote:

Very bleak. Even if these cases make up a very small portion of mortgages and loans that are described as "not at risk" then this is the end.

I find it surprising that banks still are looking no further than credit score to give out loans. If I were loaning my money to someone I would demand proof of positive cashflow in this environment; or at least a strong business plan to do so. They are asking for pain by blindly accepting credit scores.

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#3) On December 13, 2008 at 8:37 PM, OtherOracleOfOMA (31.93) wrote:

This is exactly what I've been saying. So many people are still in denial about just how much bad debt is still in the system. This isn't a post-2001 bubble, this is the big bubble that's imploding - the debt-driven consumer economy bubble; the post-1982, Bretton Woods II bubble. We've never seen anything like this. We're in uncharted waters, folks; it's going to get real bad out there. It's not out of the question that 25% or more of US households will file for BK before this is over. We're looking at another 2 years of pain, minimum. Frankly, I've stopped worrying about economic indicators at this point and have started worrying about social instability and so forth.

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#4) On December 13, 2008 at 9:28 PM, JGus (28.81) wrote:

Very powerful and sad stories! On the one hand, my heart breaks for these people. On the other hand, I can't help but think that they are merely reaping what they have sown. The real tragedy (and what pisses me off) is that multi-billion and trillion dollar corporations (banks, auto companies, et al) are not being forced to reap what they have sown. They get off the hook while the 'little people' suffer the consequences.

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#5) On December 13, 2008 at 10:09 PM, OtherOracleOfOMA (31.93) wrote:

They get off the hook while the 'little people' suffer the consequences.

Also, the government's response - the very Republican/"New Democrat" idea that they can bail out the big financial institutions but not the "little guy" - is absurd. The TARP funds will slowly be burned up as defaults increase without some government spending to reorient the economy into one that actually produces things.

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#6) On December 13, 2008 at 11:50 PM, gman444 (28.91) wrote:

Wow. Just wow.  Even as a bear I didn't realize the extent of this.  Thanks for a very educational post.  One big rec for this one....

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#7) On December 13, 2008 at 11:58 PM, alstry (36.06) wrote:

An exceptional blog.

Not only for the facts conveyed....but the logical inferences to be drawn. 

You hit the central issue dead on.....

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#8) On December 14, 2008 at 3:29 AM, Mary953 (77.11) wrote:

nuf2

The decisions made by these people are painful to you.  

This shows in your writing.  You have come face to face with the wreckage created by falling property values and foolish (small f) choices.

I do remember, while in my 20's and 30's

(No, you don't ask a lady her age.  Let's just say, ah, very young baby boomer)

 that the books written about how to invest said that you should always carry debt on your home.  The tax system was structured to let this work for you, while saving and especially investing was punished by further taxes (see Schedule B, see Schedule D, see Sched......)

Also in the 1970's, the price of everything went up.  Constantly.  If you wanted something, you got it.  Put it on a credit card at 18% interest. Inflation was 22%.  (Just apply the sharp rise in gas prices this summer to Everything!  That was pretty much the way things were.)  If it was expensive today, it would be much more expensive tomorrow.  You saved by buying on time. 

Some of us never got out of that habit and some of us married really smart guys who knew that if you had to charge it, you didn't need it.

Nuf2, I keep coming back to that bit that "some of these people you know well."  I am sorry there.  I am certain they come to you just knowing that you have some magic formula to make it all better.  I know you wish you did.  You have my heartfelt sympathies and my prayers.  Take care, friend.

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#9) On December 14, 2008 at 1:43 PM, nuf2bdangrus (< 20) wrote:

Mary,

I won't ask and you won't tell!!!

 

It is painful to watch what is happening to all of these people.  I fell for them, but my fellings do  ot go to the point of absolving them of responsibility.  In the end, my point to them is that life goes on, different, but it still goes on.  This too shall pass.  Make a decision to either try to work it out, (for those that can) or throw in the towel. For most its hopeless. But once you've made the decision, don't look back.  Get it done with, and rebuild your life.  Learn from the lessons.

 

The frustrating part of this is that money should be a scarce resource.  Central banks abuse their power and dilute it to serve their agenda, leaving train wrecks in their path.  This skews people's behaviors, as we all have elements of greed and fear.  Speculative bubbles cause peopleto distort their behavior.  Early in this crisis, we used the moral hazard phrase.  It's never used any more, and the CB hascompletely abandoned that conern.  Early bubbles create an illusion of wealth, and make it all too easyfor politicians to foster them with rationalisztion.....the newage of technology....etc.   But they all end the same.  In tears.

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#10) On December 14, 2008 at 2:19 PM, AntiRonChapmanJr (99.80) wrote:

everybody buck up, it wont be so bad...

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#11) On December 14, 2008 at 3:37 PM, abitare (72.47) wrote:

One of the best posts in Fooldom for some time.

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#12) On December 14, 2008 at 10:10 PM, Tastylunch (29.35) wrote:

Best post you've ever written Nuf, thanks for sharing.

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#13) On December 16, 2008 at 3:54 PM, OtherOracleOfOMA (31.93) wrote:

AntiRonChapmanJr,

I'm sorry for being rude, but what in the hell are you talking about? It won't be that bad - seriously?

I guess, in a manner of speaking, it won't be "that bad." It'll be worse. Much worse. There has never been a bubble of this size and scope, nor has there ever been a depression such as that which we're heading in to.

Matters aren't helped by the Fed and Treasury doing precisely the wrong things. For one thing, the Fed is still trying to steepen the yield curve in a vain attempt to prevent the bubble from bursting, but they're having exactly the opposite effect. As the government borrows and prints to "provide liquidity" to the system, long-term interest rates are rising, detering investment. That means fewer jobs, lower wages, and more consumer debt defaults. And by attempting to force down short-term rates, they're inhibiting the correction of the huge imbalance between the supply and demand of short-term loanable capital.

But that's not hugely significant compared to the size of the bubble; most likely, demand is collapsing so fast that there's little government can do over the next 12-15 months to avert 25% unemployment and an implosion of economic activity. At this point, the feds should just get out of the way for a while, let the bad debts be charged off/foreclosed/liquidated (which will be very painful but there's no way around it), and then slam hard on the gas with a $1.5+ trillion public sector investment package. If inflation starts rising, the Fed can hike rates. That may seem like a lot, but if it's spent wisely (i.e., to make a big dent in energy imports), it will pay for itself in short order, put millions to work, stimulate demand AND provide long-run returns on the supply side, remove the oil dependency risk, and allow the feds to significantly reduce defense spending. It's very important that the powers that be get this right, or at least stop contributing to the problem. Suffice it to say that just about everything imaginable is at stake.

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#14) On December 16, 2008 at 4:52 PM, Mary953 (77.11) wrote:

Oracle,

Perhaps AntiRonJr. means that we cannot change things, nor can we help ourselves and others by standing wringing our hands and crying 'Oh, woe is me!'

In this, he is correct.  I doubt that there are many communities that combine the expertise of this one with the interest and willingness to implement change for the better.  We see pieces like Nuf's most excellent post here and begin to cast around for answers, but at the same time, there is a bit of that concern coming through.  A large measure actually.  We are all either parents or children of ... and we filter everything through what our families mean for us and what they mean for those we hold dear. 

Is it not possible that antiron is simply sounding a note of realism? a note that we can beat ourselves before we start by approaching the rebuilding task with heavy hearts, misgivings, and a firm conviction that this job is impossible? 

I am struck by the "Dumbo's Magic Feather" allegory here.   Whether we are talking about credit ratings that are gone and just haven't showed up yet as bad credit, Madoff's disappearing billions, or any of the other instances where money that was present only on paper is now found not to be there at all, no one has stolen the cash over night.  It wasn't there yesterday or last week or perhaps last year.  The reality hasn't changed, only the perception.  So why be festive yesterday and desperate and drawn today.  Dumbo nearly crashed without his feather.  Then he learned to trust himself (happily he was a quick learner). We may need to take lessons from Dumbo, because someone just wiped out the entire pillow factory and we are on our own.

Let's not bury the economy just quite yet though, Okay?

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#15) On December 18, 2008 at 7:53 PM, bostoncelitcs (40.68) wrote:

Bernie Madoff's going to be living in a 6'x9' cell instead of his West Palm Beach Florida home

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#16) On December 20, 2008 at 11:37 AM, EnigmaDude (85.75) wrote:

This is a good blog, however, I can say from personal experience after going through a BK myself that Ron Chapman is right.  It's not THAT bad.  The world will not end.  People may have to change their lifestyles.  Some will not be able to afford that 2nd home or vacation condo.  Certain parts of the country will suffer for a while longer, but most of us will be OK.  There won't be rioting in the streets or armed gangs running through the hills robbing you blind (unless you are Paris Hilton).

These people made bad decisions and will suffer the consequences.  It happens. My sister is going thru similar times.  My life was hell just 5 years ago, but now I have a good job that is not likely to be eliminated and I am saving more than I am spending.

There will be more BKs before its all over and the American "dream" of owning a home might be more of a nightmare for many folks.  Some banks wil fail and others will have to change their lending practices.  Credit unions are a good way to obtain loans even for people (like me) who have gone thru a BK.

It is interesting to hear the perspective of someone who is directly involved in the banking industry - but it is just one person's perspective.

Have faith, give more to your favorite charity (if you can), help your fellow man/woman, and enjoy the holiday season.

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#17) On December 29, 2008 at 8:20 PM, Jerryskidz (29.50) wrote:

your cherry picking....  these are the worst stories out there... there are a significant amount of people that have savings and or equity in their house.... at the end of the day even if these people go bankrupt, they can start spending again they just have to do it with cash

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#18) On December 29, 2008 at 9:15 PM, brwn8484 (< 20) wrote:

Excuse me, for thinking outside the box, but each and every person you discussed had to go to a bank to get money.  Every loan officer at the bank and all the people flipping houses and all the the car companies that extended more and more credit... all have some blame in this terrible situation. 

In fact, we all are to blame.  I have been counseling folks for years and I always tell people to take what the bank is willing to lend and cut the amount by 50-70%.  Yes and I have been doing that for years.   We are all to blame by assuming that homes that continue to deteriorate are an inflating asset.  Each one of us is to blame for our greed.  I have also counseled folks to diversify their assets and investments, yet I cannot count the number of times I was told... Oh I have all my money tied up in my house or my rentals.  Well the greed and lack of discipline has caught up with all of us.  

One last thing... We all have been duped by the bankers and the wall street fast talkers and the politicians.  The greatest Ponzi scheme of all is called Social (in)Security and it is perfectly legal in the governments eyes.  The second greatest Ponzi S. is the TARP.  Our leaders and politicians are fooling themselves if they think they can borrow their way out of this.  Thats exactly what got us into this mess.  Bernie Madoff may have scammed his clients but we are all to blame for the Social Security Ponzi scheme.  We all sit back and expect our children to continue paying the Ponzi Socialist Bank even while we smile and tell ourselves that the "dirty little secret" is no big deal.  After all we dont want to upset the greatest socialist experiment ever foisted on the American people.  Well, now we have more dirrty little secrets to smile about. Not only is Social Security going to go broke, we are all going to go down that path after the govt spends our last assets on corrupt and greedy business leaders and politicians.   The TARP, Social Security and every mismanaged asset are all part of the problem.  We are all part of the problem.  

All it takes for evile to flourish .... silence of the people.  We have been silent, far too long.  Call your representatives and demand that your elected Reps become part of Social Security.  Demand that we stop the madness of lending money we dont have.  Let the businesses that are in trouble fail,  And most importantly let the housing market correct itself.   We are all heading down a dangerous path if we ignore the common sense answer to this problem.  It may not be comfortable or easy, but it is the best way to solve this mess.  Wake up America and begin to think for yourselves.

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#19) On December 30, 2008 at 9:45 AM, Mary953 (77.11) wrote:

NO          NO        NO         NO!

Brwn - Listen carefully.  I did not kill off the buffalo or carrier pigeons.  I did not take this land from the Indians (or from the people living here before that; moundbuilders in this area), nor did I own slaves, And I did not pass TARP or Social Security.  Nor have I looked at my home as anything more or less than a place to live and to be kept in good repair.

Take blame where blame is due, which is when you have actively participated in doing something wrong or injured another person intentionally. Do not take blame for something you have not done, AND do not spread blame so widely over everyone for the current economic difficulties.

"We are all to blame."  "Each one of us is to blame for our greed."  "We are all to blame for the Social Security Ponzi scheme."  etc, etc,

I was not born before FDR took the White House.  Were you?  And I did write and call my congressman requesting that he stay away from bailouts.  He did vote no as did most of the representatives from our state, Democrats and Republicans.

When you think outside the box to come up with a solution, that is a welcomed thing.  When you counsel people to look at the wreck they are about to make of their financial lives, that is a kind and fiscally responsible act on your part. 

When, in frustration, you point the finger of blame at every person, whether they had any part in the problem or in the solution, you anger those who, like you, tried to sound warnings or change the course.  You accuse those who, through change of circumstance (loss of job, loss of loved ones, etc) have had their lives dramatically altered and in effect, you say, "Your life is terrible because you were greedy.  Shame on you."  Use care when you condemn.  It helps no one and hurts many.

Nuf2's case studies here certainly points to people who lived lives above their means or perhaps just did not put money away for a rainy day.  This is not the case for everyone. You have written as though it was.

If there is a subtext to many of my responses, that unwritten subtext is "with a firm reliance on God."  This is, in part, because I have seen miracles: true, actual, supportable by medical proof miracles.  I do not, however, go into a hospital wing and tell the patients, "If you are not getting well, it is because your faith is weak, or you aren't praying hard enough."  That would be ridiculous.  It would cause misery to many but help to none.

Having, in effect, yelled at you, I will now make a confession.  I have written posts very like this before.  I am usually angry, frustrated, absolutely at the point of feeling that there is no intellegence left in the world (outside of CAPS - frequently I have just watched the news).  I write it, read it, then hit delete.  If you had done that, and just left your last paragraph with your ideas for making things better, I would be jumping on the bandwagon to hail the return of common sense.                  

I fear that, like Nuf2, you are being bombarded by people all day long who ignored your advice to buy below their means and now want you to put a bandaid on their credit and make it all better.  If this is a reaction to days of this type of stress, then I will add you to my prayers as well.  This is a pressure that you should not have to be facing and I suspect that it will only get worse.

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