Like Two Drunks Walking Down an Alley
That's how I see Bank of America and Countrywide after their recent merger. Especially after reading Robert Shiller's opinion of how the falling US housing market will affect the mortgage values for both lenders.
It just didn't make any sense to me, why one struggling mortgage firm would buyout another. The only reasons would be:
A) Both lenders needed a larger volume of loans to lower the percentage of bad loans
B) That's how big publicly-traded companies solve their problems: Either through selling assets or merging, or
C) The management of these companies are good corporate politicians (that's how they rose to the ranks of management), but really dumb businesspeople.
The mega-mergers of the past several years have been bad for American business. It's lessened competition between firms, reduced the number of jobs, and given a temporary bailout for bad management and business decisions.
B of A and Countrywide are like a couple of drunks walking on a downtown city sidewalk after midnight, struggling to stay standing and make their way home. Maybe they make it home safely, or maybe they get busted for DUI - or worse.
As their balance sheet stands now, there could be enough good loans to make up for the bad ones. But going forward, Shiller says that may not be the case:
"When people see that their houses are worth a lot less than their mortgage balance, they have an incentive to default. The troubled mortgages that Countrywide already has will be followed by even more troubled ones.''
And that's what concerns me. When the average financially-illiterate American homeowner realizes that he or she won't see any equity gains for years to come, it could trigger even more foreclosures than we've seen from the sub-prime/option-ARM fiasco. These could be homeowners who are current on their mortgage, but as Shiller says, have an incentive to default.
When you combine this with a declining dollar that's losing purchasing power, plus tightened lending standards which will probably require a 5-10% cash down payment, I don't see how the real estate market will rebound anytime soon.
The recent spikes in gold and silver have made me wonder if the rest of the world knows something most Americans don't: Our country is heavily indebted, essentially bankrupt, and the only way it can get out from under this mountain of debt is to inflate the currency and try to pay it back with cheaper US dollars.
I hope I'm wrong, but economic fundamentals and laws and pretty stubborn things. I pray that our leaders come to their senses, start to cut federal spending and return to a more sane monetary policy. Time will tell.
It just didn't make any sense to me, why one struggling mortgage firm would buyout another. The only reasons would be:
A) Both lenders needed a larger volume of loans to lower the percentage of bad loans
B) That's how big publicly-traded companies solve their problems: Either through selling assets or merging, or
C) The management of these companies are good corporate politicians (that's how they rose to the ranks of management), but really dumb businesspeople.
The mega-mergers of the past several years have been bad for American business. It's lessened competition between firms, reduced the number of jobs, and given a temporary bailout for bad management and business decisions.
B of A and Countrywide are like a couple of drunks walking on a downtown city sidewalk after midnight, struggling to stay standing and make their way home. Maybe they make it home safely, or maybe they get busted for DUI - or worse.
As their balance sheet stands now, there could be enough good loans to make up for the bad ones. But going forward, Shiller says that may not be the case:
"When people see that their houses are worth a lot less than their mortgage balance, they have an incentive to default. The troubled mortgages that Countrywide already has will be followed by even more troubled ones.''
And that's what concerns me. When the average financially-illiterate American homeowner realizes that he or she won't see any equity gains for years to come, it could trigger even more foreclosures than we've seen from the sub-prime/option-ARM fiasco. These could be homeowners who are current on their mortgage, but as Shiller says, have an incentive to default.
When you combine this with a declining dollar that's losing purchasing power, plus tightened lending standards which will probably require a 5-10% cash down payment, I don't see how the real estate market will rebound anytime soon.
The recent spikes in gold and silver have made me wonder if the rest of the world knows something most Americans don't: Our country is heavily indebted, essentially bankrupt, and the only way it can get out from under this mountain of debt is to inflate the currency and try to pay it back with cheaper US dollars.
I hope I'm wrong, but economic fundamentals and laws and pretty stubborn things. I pray that our leaders come to their senses, start to cut federal spending and return to a more sane monetary policy. Time will tell.
posted by Brian Ochsner | 12:07 PM
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