Oh that Ben Bernanke, aka Boom Boom, aka Helicopter Ben, aka Big Baller, aka credit liquidity magician. After talking to the market with a stern voice and demonstrating that he does have some restraint with rate cuts, he follows the next day by opening up a corner loan shark store. While they don’t have a problem having troubled buyers calling up a toll free number and opening up their financial books as if it were a therapy session, they want to keep a lid on what is going on with troubled banks:

“Some market observers suggested that banks would likely be to able to avoid the so-called stigma associated with the discount rate and borrow money through the auction process at a lower rate than the discount rate.”

After all, you wouldn’t want to hang out with a schizophrenic bank and have your friends and family start whispering behind your back. So even though the discount rate only saw a .25 basis-point cut, we now realize that many beleaguered banks can go even further off the books and borrow money at lower rates. Now riddle me this, where can you as an American go and borrow funds lower than the discount rate? As you are starting to realize there is a two-tiered system where banks have certain privileges bestowed to them that the common person is not. We all know this but it is one thing when banks act responsibly and manage their budgets wisely, instead they act like a bunch of drunk frat boys at a college party. The credit keg stand that the Fed is doing is simply breath taking. At what point can we stop this credit binge? In fact, the markets are realizing more and more that the Fed is having less and less of an impact because in reality, the consumer is starting to feel the pressure of all consuming debt loads. Then we have the pot calling the kettle black. Freddie Mac has a YouTube video showing how to avoid fraud. Bwahaha! I think this is five years too late but better late than never. I’m sure some sub-prime pusher in their PR department is developing a video called, “What you can do with us to stop us from giving you stuff that is financially horrible.” Simply astounding.

Even though the market initially responded positively to Boom Boom, housing stocks have not. In fact, they are continuing their downward spiral into the abyss. When you take a few seconds to look at the income statements and balance sheets of the big players, you will realize that they are on the edge of insolvency. If we were to look at a person with debt higher than their asset worth, monthly carrying costs that can’t be met with current income, and a portfolio of depreciating assets we would recommend them to seriously consider bankruptcy. You would think someone had gone off their meds if they were suddenly given more credit in the face of their proven inability to financially manage their funds. Well this is what is happening with banks and the Fed. All this rhetoric and confusion is there to masquerade the fact that these irresponsible lenders got swept up into the greed and now the piper is faintly coming over the hill. It looks like the market is finally starting to see past some of this hogwash. The market was punished even in the face of a rate cut because it wasn’t enough; the user needs his dosage upped. Today stocks are currently up but housing stocks are taking another hit. And why wouldn’t they? WaMu announced they are completely shutting off their sub-prime outlet and eliminating 2,600 jobs. This is a new tactic we are seeing. I guess their premise is if we are open with the current mess it is like admitting that you have a problem and people will be more understanding. This tactic may work. On the other hand we have Countrywide taking the Baghdad Bob approach and saying, “everything is fine! Please, look the other way.” Back in October this was played up:

“Countrywide on Friday reported more than $1 billion in third-quarter losses, mostly on write-downs related to bad loans, but promised that it had taken steps to adapt its business and would report profits in the fourth quarter and in 2008.”

That is a ridiculous assertion and this is what was pushed:

“Countrywide Financial Corp., the nation’s largest mortgage lender, reported a $1.2 billion loss in the third quarter as fallout from rising home loan defaults and the ongoing housing downturn put a crimp on the company’s loan originations and forced the company to set aside millions in loan-loss provisions and writedowns. Management predicted it will turn a profit in the fourth quarter and in 2008 and cited efforts to shift funding of its home loan originations through its banking arm.”

When this was announced, CFC was trading at $17.51 while today it is trading for $10.43, a drop of 40 percent in market cap in a little over a month. We have about 3 weeks left in this quarter and how they will turn a 4^th quarter profit is beyond me. We will see in late January or early February the actual books and see if this is the case. My take with them being part of Paulson’s elite team of the Hope Now Alliance, desperate times call for desperate measures. There was also a post from a realtor attending one of their conferences this week which offers more insight into where the company is today. With this as our back drop, let us jump into the trenches and see what is happening on main street USA.

Sesame Street Cerritos California

Can you tell me how to get to Profitability Street? Our next home takes us to the middle class city of Cerritos. Today’s home is a nice 4 bedroom 2 bath home which is what any professional working couple would imagine being a starter home. The home is listed at $660,000 and is now back to 2005 prices. The home sold in May of 2005 for $648,000 and with the current price, is practically breaking even. If someone bought this home on a 2/28 mortgage it has already recast and the new payments are probably the reason for the current short sale. And as we all know, there are so many preconditions for the Hope Now rate freeze that this home would not qualify. So they have two options, either lower the price and sell or foreclose.

We are in the land of multiple prices. Here are the various price points:

The Zestimate comes in at: $748,000

Previous sale in 05/2005: $648,000

Current Sale Price: $660,000

A neighbor home just sold in October 2007 for: $600,000

Who is right on Sesame Street? As you can see, prices are all over the map and we are now starting to see the price pressures strike more desirable areas in Southern California. We have yet to see the credit crunch impact prices in prime areas and 2008 is the year of reckoning since now we will see the “prime” Alt-A loans and other NINJA products resetting from supposedly prime and high FICO score models of financial responsibility. Last night flipping throught he channels Suze Orman is now doing a live show and she had this woman from the Inland Empire talking about the inability to support her rate reset and how she was high school valedictorian. This is beyond being smart. This is about spending more than you earn or can support. In fact, if the mentality was the same as it was a few decades ago it wouldn’t matter if prices dropped since you saw your home as a place rooted in the community and not a commodity to be flipped. Plus, you were on a fixed note. Now everyone in high priced metro areas has some sort of elixir mortgage and no one has any historical data to see how things will play out when things go bad. Thanks Alan Greenspan for pumping ARMs! You were spot on. Only doctors, lawyers, and high paid professionals used these products. It isn’t a shock that a sub-prime loan goes into default since that by its nature is highly likely but when you see prime notes hitting snags the market will quickly shift because then it signifies that everyone is now involved in this mess. We are all now living on Sesame Street.

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