BILL BUCKLER of THE PRIVATEER

BEST OF BILL BUCKLER (source http://www.investmentrarities.com/archives.html )
March 28, 2007

After the initial uproar over the US subprime mortgage sector debacle, things have gone rather quiet, at least in the US major financial news media. But the contagion is spreading, affecting numerous other areas. In the background lies this. Between 2000 and 2006, US house prices climbed by 75 percent as counted in constant US Dollars. There is no US historical precedent for such a climb in the last 120 years! Further behind this housing bubble stand two huge US financial institutions, Freddie Mac and Fannie Mae. They specialise in buying mortgages originated by banks and other lenders which they re-package into mortgage-backed securities (MBS) which they re-sell to pension plans, fund managers and investment banks inside and outside the US. US subprime and Alt A (the credit category above subprime) mortgages accounted for 26 to 30 percent of outstanding US mortgages and about 40 percent of total US securitised mortgage issuance.

How To Blow Financial Bubbles:

From the start of 1991 until the beginning of 2004 (the last year the books of these two institutions were in some kind of order) the self-owned mortgage portfolios of Fannie and Freddie grew from $US135 Billion to $US 1.56 TRILLION. Their holdings of US mortgages grew from about 5 percent of the total US mortgage market to more than 20 percent. To buy all these mortgages, Fannie and Freddie have to borrow. Their combined debts have climbed as they issued $US 3 TRILLION in new debts. They have total debts of $US 5.2 TRILLION. Behind them stands an "implicit" Federal Government guarantee.
For themselves, Fannie and Freddie have $US 79 Billion in capital but they have guaranteed $US 3.8 TRILLION in US mortgage loans. That is nearly 30 percent of the US Gross Domestic Product (GDP).

US Mortgage Belt Update:

In the last three months of 2006, US lenders began foreclosure proceedings on about one out of every 200 mortgages, the highest rate on record dating back 37 years, according to the US Mortgage Bankers Association. Some 1.5 million American homeowners will face foreclosure this year, RealtyTrac says.

The US housing market is now beset by falling prices with too much inventory and now foreclosure sales will arrive. In January, there were 4.09 million new and previously owned homes for sale, up from 3.41 million a year earlier, according to data from the National Association of Realtors and the US Commerce Department. US initiation of foreclosures on homeowner loans accelerated in the fourth quarter to the fastest pace since the US Mortgage Bankers Association began its own survey 37 years ago.
Ó 2007 – The Privateer
http://www.the-privateer.com
capt@the-privateer.com

**We cannot see the future, but one can guess from looking at history, what possible, more probable outcomes might be ahead of us. The credit expansion we have been witnessing, blowing almost every asset class up with it, is unsustainable in perpetuity. How it deflates will determine living standards for many years to come.

I am IN CASH because I believe assets are over priced, and I will wait with BUYING power to scoop them up. I have rid myself of debt. But if we get a defaltionary spiral from the unwinding of these credit excesses, the winners will be those who lose the least as RR likes to say.

D