 One of the things we’ve been touched on in various passages of The Elliott Wave Financial Forecast is the unexpected ways in which things get turned on their head in a bear market. In the latest issue, for instance, EWFF covers credit-default swaps. On the way up, they performed wonderfully for bond holders and companies alike because they allowed bondholders to protect against downside risk without actually selling a given companies bonds. This kept the corporate bond market percolating as even borderline businesses plans were able to attract capital. This was great for the economy as it kept even the most marginal enterprise humming along – at least until the trend changed. Now that everything is headed the other way, trillions and trillions in swaps have been issued. In fact, the swaps are worth way more than the bonds that they are derived from. So much more that faltering companies will be worth more to financial participants dead than alive. This means workout plans and loans in which companies survives by restructuring debts will be a thing of the past for many firms.
The walk-away response to falling home prices is another shocker, nobody thought twice about it when stocks were rising. Jim Bianco of Bianco Research says financial participants have yet to fully grasp this dynamic:
"Refusing to pay a mortgage when one has the ability to do it, because home prices are falling, is a real trend. We believe it is being fueled by the large body of borrower-friendly foreclosure laws set up over several decades. In other words, homeowners used to "beg borrow and steal" because they thought home prices only went up. So, greed drove them to do whatever was necessary to pay their mortgage in order to hold onto their home. Now that they have little-to-no equity and do not believe home prices are going to rise anytime soon, they are walking.
Here's an excert from a "60-Minutes" interview that illustrates the homeowners emerging belief that they don't have to pay their mortgages because house prices are supposed go up:
STEPHANIE VALDEZ: Why pay a $3,200 payment on a 1200-square-foot home? It makes no sense.
STEVE KROFT: That's what you agreed to do when you bought the house.
STEPHANIE VALDEZ: Fine. If the value is going up. But we're not going anywhere. The price or the value is going down. It makes no sense because we will never be able to refinance and get a lower payment. There's no way.
STEVE KROFT: You're saying, essentially, that you're going to stop making payments on it? You're just gonna let it go into foreclosure?
STEPHANIE VALDEZ: You know, that's the only advice we've gotten so far is walk away from the home. We don't want to do that to our credit. Why can't our mortgage company work with us?
As Bianco notes, the laws in many state's have been changed so that it is now "easy and convenient" for howowners to walk away. Forgiving foreclosure laws are another by-product of the easy money era. When the new tight-money era gains full control, the costs of “walking away” will increase. In the meantime, banks' real estate interests are going to be far more hands-on than they ever imagined. |
