The Easy Society

Things are starting to get a bit rough for “The Easy Society.” Florida Today is reporting, “5,600 Brevard Residents Are on the Brink of Losing Their Homes”:

“A wave of home mortgage foreclosures is sweeping across Brevard County — signaling a disastrous end to the local housing boom for those who could lose their homes…

“Many of the cases stem from homebuyers — both residents and investors — getting sucked into risky loans, with limited options to refinance or sell because of the recent decline in local property values…

“The trend is part of a rise in foreclosures nationwide, and especially in Florida, which ranked second in the nation in 2006 in foreclosures, behind California.

“In Brevard County, there were 982 foreclosures from November through February, more than double the 377 foreclosures during the same four-month period a year earlier, according to data provided by Brevard County Clerk of Courts Scott Ellis. The figures include some commercial foreclosures, but the vast majority are residential.

“In addition, there are more than 5,600 local properties where the owners are at least two months behind in mortgage payments, according to, a Web site that tracks such data…

“If there is a marked downturn in the economy, ‘this could be seen as the tip of the iceberg,’ said David Brown, Bank of America professor at the University of Florida’s Department of Finance, Insurance, and Real Estate…

“‘There are a variety of factors here,’ said Steve Srein, founder of People’s First Financial Services of Melbourne. ‘The first thing is people are not changing their lifestyles to pay for the loans they took on their homes. We’ve adapted to what I call “The Easy Society,” in that we made it easy for people to get into houses with submarginal credit. Since they had submarginal credit, that puts them in the subprime category, ripe for a product like the exotic mortgage or the junk loan, or optional adjustable-rate mortgage.’

“‘The problem today is that the people were pushed into loans they really couldn’t afford,’ Srein said. ‘The real estate people and the mortgage brokers are saying the borrowers knew what they were doing. But, really, it’s the optional (adjustable-rate mortgages) that are the big culprit behind the whole problem’…

“‘These people weren’t prepared for what they were getting into,’ Srein said. ‘They weren’t ready for phenomenal real estate tax increases and phenomenal homeowners’ (insurance) increases. So if you take that element, and combine it with a person that isn’t willing to make changes in their finances, you have defaults. If your habit is spending on lavish trips or spending on clothes, you need to cap the spending to keep your house. It’s the wants versus the needs.’

“The other factor is that, in recent years, housing prices have soared in Florida overall, Srein said, ‘and the salaries have not.'”

Tsunami of Defaults

A tsunami of subprime defaults is about ready to sweep The Easy Society right out of their houses. Fed Governor Susan Bies says, “Subprime Defaults Are ‘Beginning of Wave'”:

“The nation’s banks are just beginning to feel the pain of defaults on risky mortgages they made at low introductory rates when housing prices were soaring, U.S. Federal Reserve Governor Susan Bies said.

“Bies, who has been the Fed’s top banking policy official in her tenure at the U.S. central bank, said today banks are likely to see more missed payments and foreclosures as consumers with weak credit histories begin to face higher monthly mortgage payments.

“‘What’s happening is the front end of this wave of teaser-rate loans that are coming into full pricing,’ Bies said at a risk-management forum in Charlotte, N.C. ‘So what we’re seeing in this narrow segment is the beginning of the wave. This is not the end, this is the beginning’…
“The Fed and four other bank regulators released proposed guidelines last week instructing banks to strengthen their underwriting standards and offer clear disclosures on loan terms to subprime borrowers.

“The central bank also said last week that the delinquency rate on banks’ residential real estate loans reached a four-year high last quarter.

“Bies said the problems in the mortgage market are well contained.

“‘We’re seeing this in a very narrow segment,’ Bies said. ‘We’re watching for contagion, we haven’t seen it.’

“Outside of the housing and auto industries, ‘the economy is strong,’ Bies said.”

Given that housing alone accounted for over 40% of the jobs this recovery, that last statement by Bies seems pretty feeble. The Fed is also four years and trillions of dollars too late on those lending guidelines. I talked about that in “Malinvestments, Predatory Lending, and Demagogues,” and it is likely that I will be writing on that theme again soon.

Contagion Watch

So the Fed is “watching for contagion.” Exactly what can the Fed do about it when it hits? That will not be Bies’ problem, as she is cleverly leaving her post at the end of March, as Forbes reported back in February in “Fed Gov. Bies Quits”:

“Two days after a group of major U.S. banks asked regulators to reconsider proposals for regulating bank risk, the Federal Reserve governor heading their implementation resigned.

“Fed Governor Susan Bies submitted her resignation on Friday that will become effective March 30. Bies leaves five years into an appointment that was not slated to end until 2012. In a resignation letter address to President Bush, Bies called her experience on the board ‘very rewarding’ but offered no reason as to her departure.”

That seems like a good move. I would not want to stick around for this tsunami, either. Most of those in The Easy Society won’t even know what hit them. They will be blaming predatory lenders, hurricanes, insurance companies, and anyone and everyone but the primary culprit (the Greenspan/Bernanke Fed). I suspect that is the real reason (at least one of them) for Bies’ resignation.

To be fair, Forbes also reported:

“In her last position, she was spearheading efforts to revise and implement the international capital standards for banks developed in 1988. Although banks and regulators agreed the old standards were outdated and overly simplistic, updating them has been a contentious issue for years.

“Bies had recently voiced frustration at the slow progress. After a speech at the National Credit Union Administration’s Risk Mitigation Summit in January, Bies told reporters that ‘I’m an impatient person. I clearly wish that things were going faster, but I’m very happy that we’ve got everything out for comment now.’

“On Wednesday, four major U.S. banks submitted a letter to the Federal Reserve and urged it to move away from certain Basel II proposals. JPMorgan Chase, Washington Mutual, Wachovia, and Citigroup complained that the new rules would require U.S. banks to hold more minimum capital and would give foreign banks an advantage.”

If Bies is resigning because she refuses to go along with tightening minimum capital requirements, then perhaps she should be applauded. For now, she isn’t saying. Once she is gone, I hope she will disclose her reasons. It will also be interesting to see if she stops chirping the economy is strong with Paulson, and starts singing the recession blues with Greenspan.

Regardless of what tune she will be singing, The Easy Society is in for very harsh times.

Mike Shedlock ~ “Mish”

March 13, 2007