A Widening Credit Squeeze?

Both Newsweek (http://www.msnbc.msn.com/id/20201030/site/newsweek/)and MSNBC (http://www.msnbc.msn.com/id/20151564/site/newsweek/) have stories today about the growing fallout from the expanding sub-prime mortgage melt down and possible related coming attractions. On the mortgage front, the Federal Reserve and other regulators have done an abysmal job at controlling the growing web of damage as reviewed by Daniel Gross:

If the containment policy of the Cold War worked as well as this subprime-mess containment policy, we'd all be speaking Russian and living on collective farms. So far, the subprime catastrophe has been "contained" to the growing list of subprime lenders that have failed. And to some pretty big hedge funds in New York, Boston, and Australia that traded the toxic junk produced by the subprime lenders. And to the investment banks that managed some of those hedge funds and lent money to them. And to some nonsubprime lenders, the biggest of which, Countrywide Financial, last month reported declining earnings because of rising defaults. And to smaller nonsubprime lenders like American Home Mortgage, which just five weeks after assuring investors it would stabilize, filed for Chapter 11 this morning. And to the more than 6,000 laid-off American Home Mortgage workers, who, before last week, were utterly insulated from the ravages of the subprime market. And to a German bank. And to the career of Warren Spector, the former heir apparent at Bear Stearns. And to publicly held homebuilders—downscale ones like Beazer, and upscale ones like WCI Communities, the builder of "amenity rich" condos whose board in April dismissed a $22-per-share takeover offer as inadequate. Now the stock trades at about $6.60.

The fallout, as it usually does, may now be starting to move into credit card rates and other credit segments which could put further pressure on already strapped homeowners and consumers:

That raises an important question: is Cap One’s rate increase the start of a widening credit squeeze? If so, it would be a direct result of the home-mortgage crunch, currently roiling financial markets worldwide. “We’re not in the same world as we were five or six months ago,” says Keith Leggett, senior economist at the American Bankers Association. “There is a growing risk aversion among market participants.”

As home prices across the United States have stagnated or fallen and consumers have tapped out the equity in their homes, banks have gotten more cautious about lending and have tightened their standards for new mortgages and home-equity loans. As a result, more Americans are shifting debt onto credit cards. This week, the Federal Reserve said non-real estate consumer-credit usage rose at about twice the rate than economists had predicted for June. And revolving credit usage (which includes credit-card debt) was up by 8.7 percent at an annual rate for the month. That boost helped bring total consumer credit, both revolving and not revolving (like auto loans), to a record $2.459 trillion.

Meanwhile, continued concerns about a credit crunch in the stock markets may be putting pressure on credit-card companies to tighten standards and raise rates. (Wall Street fell sharply again on Thursday after a French bank said it was freezing three funds that invested in U.S. subprime mortgages because it was unable to properly value their assets.) The market “has changed the psychology of the situation,” says Smith. “Now they’re saying, ‘Oh my gosh, we’re going to get into the same trouble these mortgage companies are getting into, we’d better tighten standards too’.” He predicts that evidence of tightening—and a resulting increase in consumer interest rates—could show up as soon as next week, when the Federal Reserve releases its quarterly survey of loan officers.

I truly hope my fears are wrong, but I suspect not based on what I am seeing in the real estate market even here in Norfolk which is usually somewhat insulated by the huge military presence which tends to create a steady flow of people moving into and out of the area. Currently, it is largely the real estate investor clients who are fueling the current sales that are occurring. To be candid, I and business partners are working to focus on and establish an in depth network of service for investors who will be able to pick up attractive properties as foreclosures increase and the number of lender owned repossessed properties increase.

Other suggest that Hillary Clinton likewise realizes that the negative economic fall out will be huge: http://www.eyeon08.com/2007/08/08/why-is-hillary-talking-about-housing/. If the bottom drops out between now and November 2008, this could be a huge political issue.