This is a question being asked this week as we witness one of the most dramatic downturns in US economic history. But are we on the verge of another great depression? Economist Robert J. Samuelson says “œnot even close” in his column appearing in the October 13 issue of Newsweek.
Samuelson states that economic downturns hardly ever evolve into national tragedies. In fact, the US has been through 10 recessions since the late 40’s. While they did have a very real effect on the economy and of the people living through them, they actually only lasted for an average of 10 months. The two worst were from 73 to 75 and in 81 to 82. Both lasted 16 months and unemployment rates peaked at nearly 11%, well above the average for the other recessions of 7.5% and of the current rate of 6%.
Coinciding with the number of recessions over the last 60 years are the number of bear markets. Since WWII the number of bear markets has also been 10. A bear market is one in which the S&P Index declines at least 20% from the most recent peak. The average of all post war bears was just over 31% . The .com crash of the nineties witnessed a fall of over 50% and last week the market was down 30% from one year ago.
Compare all of this to the Great Depression, where the market lost a whopping 90% of its value resulting in nearly a decade of hard times. Most economist agree that this is not likely in today’s environment where the Federal Reserve is actively injecting funds into the finance sector, unlike the Federal Reserve of 1929 that did relatively nothing to prevent the collapse of the US economy.
Before you settle on a new lender, you may want to check the Mortgage Lender Implode-O-Meter at ml-implode.com. The site proclaims a mission of transparency, education, and accountability for the mortgage industry. The site was started in January 2007 by blogger Aaron Krowne who realized that the housing market was critical to the success of the US economy and grew frustrated by the lack of coverage of the sub prime housing crisis by the mainstream media. Starting with a single page with only 6 lenders listed, ml-implode.com soon had dozens of lenders listed and began picking up national media coverage from Bloomberg and CNN. It is now consdered and authority on the current state of the mortgage crisis in the US and received over 100,000 visitors a day.
The site breaks down the large mortgage companies into 3 categories.
Although it is a community centric forum, the editorial staff requires that 2 out of 3 of the following criteria be met before a company makes it to the “implosion” or “ailing” list:
Over all the site has some great information and is organized in a consistent manner. I highly reccomend giving it a look or even subscribing to the feed if you want to stay up to speed on the latest mortgage implosions.
This week Senator Barack Obama outlined his plan to save the US housing market while speaking to a group of Union members in New York. His plan centers on the modernization of the financial regulatory system as well as a second stimulus package. According to Senator Obama, the regulatory agencies in Washington have let the special interest set the agenda for reform.
The Obama plan is a three prong approach.
1. Modernize the Financial Regulatory System
This includes giving the Fed supervisory authority over any institution where the Fed is a lender of last resort; i.e. Bear Sterns. Obama also wishes to increase disclosure requirements for investment institutions and streamline the entire process of regulation. Currently, many institutions are regulated by multiple agencies with overlapping areas of authority. This makes it difficult to identify who is responsible for enforcing compliance.
2. Help Homeowners Facing Foreclosure
Obama proposes the start of a new Housing Security Program to give lenders an incentive to refinance existing mortgages into fixed 30 year mortgages backed by the federal government. He also proposes closing the Chapter 13 bankruptcy loophole for mortgage companies and defining mortgage fraud and predatory lending at the federal level.
3. $30 billion Economic Stimulus Package Specific to the Mortgage Crisis
The stimulus package would set aside $10 billion in foreclosure prevention for home owners in danger of losing their home. Another $10 billion would go to state and local governments that are facing revenue shortfalls due to the housing market. The rest of the package would be used to extend the length of unemployment benefits for full time workers and offer compensation to many part time workers not currently included in the system.
March 29 (Bloomberg) — President Bush announced plans yesterday to increase government assistance to distressed homeowners in an effort to curb the current crisis in the mortgage industry. This is no doubt in response to pressure from leading Democrats who have been vocal in their criticism toward the administrations “wait and see” approach.
Although no firm details have been announced, the primary target of the Bush plan will be to tackle the problem of “underwater” loans or loans that are larger than the actual value of the property. This will mean that cooperation with lenders will be essential as any strategy will require the lenders to forgive part of the loan and refinance the remaining principle with backing from the government. The plan will likely require that homeowners remain in their homes, are able to afford the new payments, and that their lender is willing to sign off on the changes.
Thornburg mortgage is just the latest wall street lender on the brink of collapse as mortgage backed securities continue to lose all value. As of Wednesday morning, Thornburg stock had dropped 49% to only $1.50 a share after the company announced that it needed to raise at least $948 million dollars to stay afloat. The plan entails using convertible bonds that will give investors a 27% share in the company, further diluting the already worthless shares for the current share holders. The deal has yet to materialize as investors may be wary after the recent Bear Sterns debacle. Originally scheduled for a Thursday release, the convertible bonds have been pushed back till Monday as Thornburg works to attract potential investors.
Experts say that Thornburg mortgages are not defaulting in large numbers but the current credit crisis has lessened their value as an asset and in turn, Thornburg’s overall equity.