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Back in the fall of 2005, when the mortgage lending industries was still booming, The Elliott Wave Financial Forecast cited various signals pointing to an imminent reversal. One of the last ones to flash was the banking industry’s willingness to tap the market for  illegal immigrants. It was only a matter of weeks before the housing and mortgage lenders that fueled its expansion entered a deep slump that continues in effect. With Bank of America’s new no citizenship required credit card, the consumer credit industry just touched the same milestone. 

A Bank of America spokesman says, “The credit cards are not aimed specifically at illegal immigrants, but instead people who lack solid credit histories.” In other words, the consumer lending industry is now stretching standards to the same they were at in 2005 when the mortgage industry scraped the bottom of the credit barrel. There is one difference from housing in 2005, however; the new credit card program is generating a stiff backlash from anti-immigration groups. “"It helps to further embed illegal immigrants into American society," says research director for the Center for Immigration Studies in Washington, which backs stricter enforcement of immigration laws. “It makes amnesty a fait accompli." Said one Congressman: “I hope the administration will shut down this reckless and illegal program before Bank of America extends a line of credit to a potential terrorist.”  The response betrays a deepening animosity toward outsiders, and thus a more developed downturn in the overall social mood. As the housing situation demonstrated, however, the administration won’t have to take any action. The markets will end these instruments on their own.

EWFF, September 2005
Banks seems to be blind to the danger of overpriced collateral as they continue to stuff their balance sheets with mortgages assets. In addition to the no-interest loans, “payment option” loans in which borrowers can pay less than their monthly interest are growing fast. These loans are also known as “negative amortization” loans because underpayments increase the amount that the borrower owes. At Countrywide Financial, the largest mortgage lender in the U.S., the principal value of negative amortization loans rose almost 100 times, from a value of $33 million at the end of 2004 to $2.9 billion on June 30. (Thanks to Grant’s Interest Rate Observer for this figure.) In another unprecedented leap of lending faith, CNN reports that the banking industry is “opening its doors to a controversial new market: illegal immigrants. Despite heated political debate in Washington over illegal immigration in the United States, an increasing number of banks are seeing an untapped resource for growing their revenue stream. ‘Once you’re in the country, and you haven’t done anything wrong, the chances of being deported are very slim. Banks are banking on that.” Talk about a collision course with bear market forces. Even as U.S. governors declare border emergencies and immigration emerges as a focal point in the 2006 Congressional election, banks are looking at illegals as potentially limitless source of borrowing.

There are many reasons to believe that a bear market in real estate has, in fact, just begun. Another factor is the action in the EWI Sub-Prime Lenders Index, which the March issue of EWFF identified as the “front edge” of the great financial bubble. After completing five waves up at three degrees of trend in January (see chart on page 2 of the March issue), the index declined in five waves, sputtered higher in a countertrend bounce and reversed in what should be a powerful decline to much lower levels. The homebuilders have also joined in with a five-wave decline of their own. Reports of rising inventories are surfacing from California to Massachusetts. In Sacramento, inventories rose to a 7-year high in July then shot up another 26% in August. “The market is turning,” says a Palm Beach realtor. Houses purchased by speculators in hopes of a quick flip are “killing the market in certain areas.”

The National Association of Realtors’ web site even posted an unusual “wait-to-buy” advisory. The message was quickly removed because it was being “viewed incorrectly as a pronouncement that the bubble was popping.”