Tuesday, October 07, 2008

Flashback: A trillion dollar game of JENGA!! (Dec 9th, 2005)

I am working on some new material, but I have been out of town for the past week for work. That said, I found this post that I wrote on December 9th, 2005. I think it is ’somewhat’ related to what is going on now…but I will let YOU be the judge of that. Here is the link to the ‘original’ time I posted this article. There are some good comments to read through as well. ORIGINAL ‘Jenga’ POST


Friday, December 09, 2005

Trillion Dollar game of JENGA!!

This housing bubble is like a game of Jenga. You can see the blocks going higher and higher, you know it is going to fall down soon, but it hasn’t yet…and you just hope it isn’t on your turn when it does! The housing market is the same way right now.

Some people pulled out of the tower, and are content. Some wanted to “win”, so they kept taking turns and piling blocks on the top. Some just wanted to stay where they were, but all the people piling on the top forced things like property taxes so high, they were forced to move.

BUT, as of right now, the tower is still standing. The “players” are taking more time moving their pieces. Occasionally the ceiling fan rocks the tower and some people yell “it’s crashing!” while others look at it and say the fundamentals are fine…it is a strong table, nothing to worry about, keep piling on.

So the question is, WHAT IS going to push this thing over the edge? and WHEN is that going to happen.

In an earlier post I went over how the ARMs were set to adjust and how I think that will be one catalyst that could finally send the jenga tower falling.

Another thing that could shake the markets is if there is a liquidity crisis in the Mortgage Backed Securities (MBS) markets. These are the people the buy the loans which allow the lenders to keep making loans. They are already starting to demand more premium (interest rate) for the risk they are assuming.

I think this story from Bloomberg says it all. The title is: Housing Bubble Bursts in the Market for U.S. Mortgage Bonds . I’m not going to paste the article here, and I’m sure some of you read it already over on Ben’s blog a few days ago.

This thing is really VERY simple. You have 50-80% of borrowers taking ARM mortgages the past few years. These people got loans when rates were crazy low, and lending standards lacked “old school” criteria like verifying income, reserves, penalizing people for BK’s, etc. When these people run out of “fixed” time on their ARM and they look to refi again, they are going to find higher rates (yes, still historically low, but not super low like they had been), and much tighter lending standards because of the article above.

This combination of higher rates and tightening lending standards (they ARE happening now) is going to leave people with very few feasible options. If they can barely afford their I/O ARM at 50 and 55% DTI’s (debt to income ratios), what are they going to do?!?!?

I predict that things will be slower and prices will start a slow decline through 2006. Hot properties will still move as will properties that are priced right. I look to 2007 and 2008 for things to start looking like this: JENGA!!!

Between now and then (through 2007), there are about 1.5 trillion dollars of mortgages that will be going adjustible. I’m already seeing the tightening in the MBS markets. I was talking to my manager this week about a loan, and they told me that our investors were demanding a lot, so we could not be lenient with rate and loan exceptions. Very few times the past few years have I ever been told that. The old mantra was “we’ll find a way, we’ll make the exception”, now the mantra is “we’re not going to lose money on that loan”.

Only time will tell…but that is where I have my sites set. What do YOU think?!?!??!?



It looks like the liquidity crisis with the mortgage backed securities IS having some problems here in 2008. I know my time frame wasn’t super specific, but I think I was pretty close, especially since it was the end of 2005 and things were still ‘booming’. I don't recall any of the Wall Street firms or financial press warning people in 2005 of a liquidity crisis that might come in 2-3 years in the 2007-2008 time frame. You did hear it from a blogger that only has an Economics Major from the Naval Academy. Oh wait, maybe it isn't just 'economics' that is important, but integrity as well. More on that later...

I don’t know about you, but I can just picture Cramer doing one of his ‘Mad Money’ rants, and at the end he yells ‘JENGA’!!! Pretty much sums up Wall Street and the world markets at this time.

What do you think? I look forward to the comments.

Stay Tuned…



Anonymous Anonymous said...

holy smokes! i was just cleaning out my stale rss feeds this weekend and i thought, "nah...he's gonna write something pretty soon".

great work on this...saved me a lot of financial pain.

10/07/2008 7:18 PM  
Anonymous Anonymous said...

again. It conveyed the inevitablity of the whole situation. This site really convinced me that would happen, what we are seeing now.

I think it's a shame you semi-retired as a blogger.


10/07/2008 11:28 PM  
Anonymous Anonymous said...

O great, I had some troubles posting and see that the first sentence fell of.

I meant to say, that I reread this article last month and I thought it was brilliant. Just like I thought it was when you published it originally.


10/07/2008 11:31 PM  
Anonymous Anonymous said...

Yep - Thanks from me too.

Your blog provided the inside details in such a way that I came to believe this would all happen.

I actually believed more of this credit and asset-reset disaster would happen in 2006 and was appalled to see the Wall Street frenzy accelerate instead.

Jim aka JRip

10/08/2008 5:55 AM  
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