Six months ago at about the time the housing market in America peaked, we learned that subprime mortgages represented 13% of the total of their mortgage stock – quite incredible!
Financial institutions knowingly lent, at artificially “low start” rates of interest, 100% mortgages to people with bad credit records; not checking on anything, accepting the word of the applicant about income and all other financial matters. Given the figures quoted above, they did this on a massive scale. This would be understandable if it was the result of rogue bankers but it was not. It was a deliberate thought through business plan!
The rates of interest initially charged for many of these loans were not the correct rates but “teaser” rates - in other words, a lower rate of interest, well below the market, was charged with the unpaid amount accumulating to the debt. At a certain predetermined date, these mortgages are reset from when the full payment has to be made, not just on the original loan but also the accumulated amount of any unpaid interest.
The fact that these loans were unaffordable in the first place and even more unaffordable following the resetting, should come as no surprise. Huge numbers of these loans are still scheduled to be reset over the next few months which must lead to massive additional delinquencies. Listed below are figures indicating the size of the potential fold-up, starting from the current month of August and the numbers are billions! If you want to know why the market is running extra scared, one reason is the knowledge of this huge poisonous cloud hanging over it. Here we go:
August 2007 - US$52bn
September - US$58bn
October - US$55 bn
November - US$52bn
December - US$58bn
January 2008 - US$80bn
February - US$88bn
March - US$110bn
April - US$92bn
May - US$76bn
June - US$75bn
July - US$50bn
I suggest we adhere to a well-trusted motto from our good-old scout friend: "Be Prepared"!
King of the Birds, Lord of the Skies
Gather ye rose buds while ye may, old time is still a flying;
and this same rose that you see today, tomorrow will be dying.
CarpeDiem: Seize the Day!
- Dead Poets Society
Wednesday, August 22, 2007
Words
Your own words are the bricks and mortar of the dreams you want to realize. Your words are the greatest power you have. The words you choose and the use establish the life you experience.
Sonia Croquette
Sonia Croquette
Tuesday, August 21, 2007
Prepare to Meet Thy Maker
I am ready to meet my maker, but whether my maker is prepared for the great ordeal of meeting me is another matter.
Winston Churchill
Winston Churchill
Federal Funds Rate
Federal funds rate: What is it?
It is the interest rate that institutions pay when they borrow reserves overnight from each other. Banks borrow reserves in the federal funds market in order to meet reserve requirements set by the Federal Reserve, and to ensure adequate balances in their accounts at the Fed to cover checks and electronic payments that the Fed processes on their behalf.
Please note that changes in the federal funds rate often have a strong impact on other short-term rates. That's why everybody is watching this fed fund rate like nobody's business, which is currently standing at 5.25%. And guess who or what gets to decide this number should be altered from time to time? Or well at least 8 times a year?
Right. The Federal Open Market Committee (FOMC). She is the Federal Reserve's top monetary policy-making body! So don't pray pray huh!!! More next entry. Watch for it...
It is the interest rate that institutions pay when they borrow reserves overnight from each other. Banks borrow reserves in the federal funds market in order to meet reserve requirements set by the Federal Reserve, and to ensure adequate balances in their accounts at the Fed to cover checks and electronic payments that the Fed processes on their behalf.
Please note that changes in the federal funds rate often have a strong impact on other short-term rates. That's why everybody is watching this fed fund rate like nobody's business, which is currently standing at 5.25%. And guess who or what gets to decide this number should be altered from time to time? Or well at least 8 times a year?
Right. The Federal Open Market Committee (FOMC). She is the Federal Reserve's top monetary policy-making body! So don't pray pray huh!!! More next entry. Watch for it...
Limited Definition of Others
We must not allow other people's limited perceptions to define us.
Virginia Satir
Virginia Satir
Monday, August 20, 2007
Cross Dressing
A wealthy couple had plans to go to an evening ball. So they advised their butler that they were giving him the evening off to do as he pleasd since they would be out until quite late.
The couple went to a ball and dinner. After an hour an a half, the wife told her husband that she was horribly bored and that she preferred to go home and finish some work for the next day. The husband responded that he had to stay for a few more hours to meet some very important people who were his new business partners.
So the wife went home alone and found the the butler spread out on the couch watching TV. She slowly moved towards hime and sat down very seductively. She then told him to come closer. Then even closer.
She moved forward and whispered in his ear "Take off my dress...".
"Now take off my bra."
"Next remove my shoes and stockings."
"Now remove my garter belt and panties."
She then looked deep into his eyes and in a sharp voice shouted "The next time I catch you wearing my clothes, you're fired".
The couple went to a ball and dinner. After an hour an a half, the wife told her husband that she was horribly bored and that she preferred to go home and finish some work for the next day. The husband responded that he had to stay for a few more hours to meet some very important people who were his new business partners.
So the wife went home alone and found the the butler spread out on the couch watching TV. She slowly moved towards hime and sat down very seductively. She then told him to come closer. Then even closer.
She moved forward and whispered in his ear "Take off my dress...".
"Now take off my bra."
"Next remove my shoes and stockings."
"Now remove my garter belt and panties."
She then looked deep into his eyes and in a sharp voice shouted "The next time I catch you wearing my clothes, you're fired".
The Discount Rate
The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility - the discount window.
The Federal Reserve Banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. All discount window loans are fully secured.
Under the primary credit program, loans are extended for a very short term (usually overnight) to depository institutions in generally sound financial condition.
Depository institutions that are not eligible for primary credit may apply for secondary credit to meet short-term liquidity needs or to resolve severe financial difficulties.
Seasonal credit is extended to relatively small depository institutions that have recurring intra-year fluctuations in funding needs, such as banks in agricultural or seasonal resort communities.
Now, the discount rate charged for primary credit (the primary credit rate) is set above the usual level of short-term market interest rates. (Because primary credit is the Federal Reserve's main discount window program, the Federal Reserve at times uses the term "discount rate" to mean the primary credit rate.)
The discount rate on secondary credit is above the rate on primary credit. The discount rate for seasonal credit is an average of selected market rates. Discount rates are established by each Reserve Bank's board of directors, subject to the review and determination of the Board of Governors of the Federal Reserve System. The discount rates for the three lending programs are the same across all Reserve Banks except on days around a change in the rate.
So, no more confusion now. We are NOT talking about the Fed Fund Rates, which I will touch on later. So stay tuned, stay safe, & most importantly, stay solvent!
The Federal Reserve Banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. All discount window loans are fully secured.
Under the primary credit program, loans are extended for a very short term (usually overnight) to depository institutions in generally sound financial condition.
Depository institutions that are not eligible for primary credit may apply for secondary credit to meet short-term liquidity needs or to resolve severe financial difficulties.
Seasonal credit is extended to relatively small depository institutions that have recurring intra-year fluctuations in funding needs, such as banks in agricultural or seasonal resort communities.
Now, the discount rate charged for primary credit (the primary credit rate) is set above the usual level of short-term market interest rates. (Because primary credit is the Federal Reserve's main discount window program, the Federal Reserve at times uses the term "discount rate" to mean the primary credit rate.)
The discount rate on secondary credit is above the rate on primary credit. The discount rate for seasonal credit is an average of selected market rates. Discount rates are established by each Reserve Bank's board of directors, subject to the review and determination of the Board of Governors of the Federal Reserve System. The discount rates for the three lending programs are the same across all Reserve Banks except on days around a change in the rate.
So, no more confusion now. We are NOT talking about the Fed Fund Rates, which I will touch on later. So stay tuned, stay safe, & most importantly, stay solvent!
Subscribe to:
Posts (Atom)
