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Remember the 2007 financial meltdown? Today’s banking landscape has its own lurking dangers, and they’re not what you might expect. Dive into the intricacies of the current housing market, understand why a 3% mortgage can be a ticking time bomb, and discover what this means for our financial future. Is another massive bailout on the horizon? Join us for a deep dive into this hidden crisis.
#BankingCrisis2023, #MortgageMysteries, #FinancialForecast
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[00:00:11] Good morning have a fascinating article today about the current economic environment.
[00:00:19] Let’s get to it right now. It’s Peter Schiff. It’s off of schiff gold. They pretty much wright what he said on his podcast and he’s controversial shouldn’t be, but he is. So the headline is banks have a bigger real estate problem today than they did in 2007. And you say to yourself, well, how can that be?
[00:00:41] How can the banks be in a worse situation now or a bigger problem now than they were in 2007? I mean, that was the great financial crisis.
[00:00:50] And a lot of people get, I think correctly, a lot of people get flak for comparing this to 2008, 2009, this situation that we’re seeing in the housing market. And it’s not really like 2007 2008. And so what a lot of people spend time doing is they say, well, if it’s not like 2000 2008, what’s it like? And my answer to that is I have no idea. I’ve never seen anything like this.
[00:01:17] The mania produced by people buying houses for the last three years, given that they believed, I think at least half of the people believed that their life was going to be dramatically different after the pandemic. They didn’t know how, but they definitely believed that there was panic buying, that there was an opportunity there, though, as well. There was lower rates than people had seen in a long time, and they took advantage of that. Now, I have been and I’m still very uncomfortable with the way the situation rolled out.
[00:01:54] I don’t feel like buyers really had a great run as far as if a house was $200,000. All of a sudden, now it’s $300,000 because of the low rates. And I think that that discounted. This problem that we really have with inflation and what the government or the Fed has been trying to do is tamp down inflation that they said is transitory. If you believe in certain economic theory, you believe that the government printing all that cash is the cause for the inflation. Until they acknowledge that, and until that’s solved, you’re going to continue to have problems with inflation.
[00:02:37] So let’s get into this article. It says banks are more vulnerable to the housing market now than they were in 2017. Most people in the mainstream will scoff at that statement. They will tell you that the situation is very different today. After all, we don’t have a big problem in the subprime mortgage market. We’re not seeing a big spike in defaults. And that’s true. The problem is different this time and it’s actually worse now. Just for those of you at home, I have a different opinion about not having a big problem in the subprime mortgage market. While we don’t have a problem in the subprime mortgage market, we do have a big problem in the short term rental finance structure income only loans that are typically done by investors which default at a much higher rate than owner occupied homes, which to me, if things go south, you will see problems in that area which would cause more defaults.
[00:03:42] And so let’s get to the meat of it says the problem in 2007 and 2008 was defaults. As interest rates rose, people couldn’t afford to pay their mortgages. That forced banks to foreclose.
[00:03:57] With the real estate bubble deflating, banks couldn’t recoup their loans by selling the houses. The problem was the banks had loaned out a lot of money with zero down or negative amortization. And then the housing prices went down and people started defaulting. Because of the defaults, the banks lost money. But the vast majority of mortgages didn’t default. It was just large enough percentage that it caused insolvency at those banks. That’s true. It wasn’t like everyone defaulted, it was that enough caused problems in the marketplace.
[00:04:27] But Schiff says that there’s a different problem now. He says it’s not about default now. In fact, defaults would actually help. The banks would actually be better off if people defaulted on mortgages. The problem is the mortgage itself. The banks are losing money on the mortgage. Banks wrote these mortgages when interest rates were extremely low. A 3% mortgage wasn’t uncommon a few years ago. Now mortgage rates are above 7%. The banks are losing money on every mortgage that’s outstanding. So even though people are still paying the mortgages, the bank is still losing. Now no one, I have not heard that put this way yet. This is the first time I’ve seen it put this way.
[00:05:09] The idea that the bank is losing money on every loan does seem to coincide with the banks failing in that emergency fund that the banks have from the federal government. That was, I think it was about two or three months ago now when that bank in California ate it.
[00:05:28] They held a ton of mortgages. But anyway, so it says today there’s not a lot of defaults. People aren’t struggling to pay a 3% mortgage. And while home prices have declined, most homeowners aren’t currently underwater. Even if they are, people aren’t selling. They don’t want to give up a 3% mortgage for a 7% plus mortgage. That’s why inventory remains tight and that’s what’s holding prices up. Now I have to say I’m very uncomfortable with this idea that there aren’t a lot of defaults. There aren’t a lot of defaults yet. And my own belief is that as housing prices have gone up, the people that are struggling have been able to be carried with the rising tide. A rising tide leads all ships and in this case you can pull equity and you may say, well John, that’s not true. Show me evidence of people pulling equity. Well we just had a story last week about people refinancing at a 7% rate. Now that seems crazy. Why would you do that if you had a 3% mortgage? Well it’s possible that people are strained with their ability to pay any of their bills with it and runaway inflation.
[00:06:46] I don’t agree that home prices have declined, at least not in St. Louis, but again on a national level. Yes. But I also think that a lot of this trouble has been covered up by the rising home prices. If home prices continue to rise, fine, we won’t have a problem with the defaults. But should those home prices start going down, which almost has to happen if you’re going to continue at seven, 8% mortgage rates, we could see a lot of issues.
[00:07:21] So this is a very different crisis, he says. But it’s worse because they’re losing money on every single mortgage they have, whether or not they go into default. So this is bigger. It’s a bigger problem for the banks losing more money, and they will lose more money now than they did in 2008. That means we’ll need an even bigger bailout. All these too big to fail. Banks have an even bigger problem now than they did then, and it’s going to take an even bigger round of QE to bail them out. The problem is how’s the Fed going to do that when inflation is high as it is and it’s going higher? And that’s just it. Back in 2008, you didn’t have the inflation problem that has been dogging us for the last year or more. I started talking about it two years ago. I said, can we raise the rates a little bit, just a little bit to cool this off?
[00:08:04] But it didn’t happen. And so now we continue. It says banks face another problem in this high interest rate environment. They’re losing depositors. Investors want yield. They can pull their money out of the bank and put it in the money markets with a 5.5% yield.
[00:08:20] That is not great.
[00:08:22] That is a problem that I haven’t been paying too much attention to. And it’s only going to get worse as interest rates go up. I mean, why would you put your money at a bank when you could put it in Treasuries for a better percentage? It doesn’t make much sense.
[00:08:37] So I just wanted to bring this to your attention. I don’t think it’s getting any attention. At least I haven’t seen anything about it. And I just wanted you to be aware that this could be the problem.
[00:08:53] By the way, I don’t want housing to be a problem. I’d like everybody that has a job and has a decent credit profile to be able to go buy a house and afford one. I think what’s been going on the last little while has been terrible.
[00:09:11] But I don’t run things. I don’t run things. So anyway, be on the lookout. Well, how would we know if what Schiff is saying is true? Well, we’ll see more banks fail, that’s how we’ll know it. And then you could also question what the response will be from the Fed. Will they open up more liquidity, which should raise inflation, which would be a bad thing.
[00:09:41] But inflation is the worst problem you can have in an economy, in my opinion.
[00:09:52] It’s a tax on the poor.
[00:09:55] It’s vicious, and it’s hard to get rid of once you’ve got it. And as we’re seeing now, and people knew about this, the brightest guys in the room have known about inflation, and how they chose to handle that is not great. Not great. But that’s what I have on this.
[00:10:18] What do we got? We got a few more videos coming out soon. If you like this one, please hit the like button. Subscribe if you’re interested in real estate, financial talk. And that’s all I have. Thank you for watching. Thank you for listening. And I’ll catch you on the next one.
[00:00:19] Let’s get to it right now. It’s Peter Schiff. It’s off of schiff gold. They pretty much wright what he said on his podcast and he’s controversial shouldn’t be, but he is. So the headline is banks have a bigger real estate problem today than they did in 2007. And you say to yourself, well, how can that be?
[00:00:41] How can the banks be in a worse situation now or a bigger problem now than they were in 2007? I mean, that was the great financial crisis.
[00:00:50] And a lot of people get, I think correctly, a lot of people get flak for comparing this to 2008, 2009, this situation that we’re seeing in the housing market. And it’s not really like 2007 2008. And so what a lot of people spend time doing is they say, well, if it’s not like 2000 2008, what’s it like? And my answer to that is I have no idea. I’ve never seen anything like this.
[00:01:17] The mania produced by people buying houses for the last three years, given that they believed, I think at least half of the people believed that their life was going to be dramatically different after the pandemic. They didn’t know how, but they definitely believed that there was panic buying, that there was an opportunity there, though, as well. There was lower rates than people had seen in a long time, and they took advantage of that. Now, I have been and I’m still very uncomfortable with the way the situation rolled out.
[00:01:54] I don’t feel like buyers really had a great run as far as if a house was $200,000. All of a sudden, now it’s $300,000 because of the low rates. And I think that that discounted. This problem that we really have with inflation and what the government or the Fed has been trying to do is tamp down inflation that they said is transitory. If you believe in certain economic theory, you believe that the government printing all that cash is the cause for the inflation. Until they acknowledge that, and until that’s solved, you’re going to continue to have problems with inflation.
[00:02:37] So let’s get into this article. It says banks are more vulnerable to the housing market now than they were in 2017. Most people in the mainstream will scoff at that statement. They will tell you that the situation is very different today. After all, we don’t have a big problem in the subprime mortgage market. We’re not seeing a big spike in defaults. And that’s true. The problem is different this time and it’s actually worse now. Just for those of you at home, I have a different opinion about not having a big problem in the subprime mortgage market. While we don’t have a problem in the subprime mortgage market, we do have a big problem in the short term rental finance structure income only loans that are typically done by investors which default at a much higher rate than owner occupied homes, which to me, if things go south, you will see problems in that area which would cause more defaults.
[00:03:42] And so let’s get to the meat of it says the problem in 2007 and 2008 was defaults. As interest rates rose, people couldn’t afford to pay their mortgages. That forced banks to foreclose.
[00:03:57] With the real estate bubble deflating, banks couldn’t recoup their loans by selling the houses. The problem was the banks had loaned out a lot of money with zero down or negative amortization. And then the housing prices went down and people started defaulting. Because of the defaults, the banks lost money. But the vast majority of mortgages didn’t default. It was just large enough percentage that it caused insolvency at those banks. That’s true. It wasn’t like everyone defaulted, it was that enough caused problems in the marketplace.
[00:04:27] But Schiff says that there’s a different problem now. He says it’s not about default now. In fact, defaults would actually help. The banks would actually be better off if people defaulted on mortgages. The problem is the mortgage itself. The banks are losing money on the mortgage. Banks wrote these mortgages when interest rates were extremely low. A 3% mortgage wasn’t uncommon a few years ago. Now mortgage rates are above 7%. The banks are losing money on every mortgage that’s outstanding. So even though people are still paying the mortgages, the bank is still losing. Now no one, I have not heard that put this way yet. This is the first time I’ve seen it put this way.
[00:05:09] The idea that the bank is losing money on every loan does seem to coincide with the banks failing in that emergency fund that the banks have from the federal government. That was, I think it was about two or three months ago now when that bank in California ate it.
[00:05:28] They held a ton of mortgages. But anyway, so it says today there’s not a lot of defaults. People aren’t struggling to pay a 3% mortgage. And while home prices have declined, most homeowners aren’t currently underwater. Even if they are, people aren’t selling. They don’t want to give up a 3% mortgage for a 7% plus mortgage. That’s why inventory remains tight and that’s what’s holding prices up. Now I have to say I’m very uncomfortable with this idea that there aren’t a lot of defaults. There aren’t a lot of defaults yet. And my own belief is that as housing prices have gone up, the people that are struggling have been able to be carried with the rising tide. A rising tide leads all ships and in this case you can pull equity and you may say, well John, that’s not true. Show me evidence of people pulling equity. Well we just had a story last week about people refinancing at a 7% rate. Now that seems crazy. Why would you do that if you had a 3% mortgage? Well it’s possible that people are strained with their ability to pay any of their bills with it and runaway inflation.
[00:06:46] I don’t agree that home prices have declined, at least not in St. Louis, but again on a national level. Yes. But I also think that a lot of this trouble has been covered up by the rising home prices. If home prices continue to rise, fine, we won’t have a problem with the defaults. But should those home prices start going down, which almost has to happen if you’re going to continue at seven, 8% mortgage rates, we could see a lot of issues.
[00:07:21] So this is a very different crisis, he says. But it’s worse because they’re losing money on every single mortgage they have, whether or not they go into default. So this is bigger. It’s a bigger problem for the banks losing more money, and they will lose more money now than they did in 2008. That means we’ll need an even bigger bailout. All these too big to fail. Banks have an even bigger problem now than they did then, and it’s going to take an even bigger round of QE to bail them out. The problem is how’s the Fed going to do that when inflation is high as it is and it’s going higher? And that’s just it. Back in 2008, you didn’t have the inflation problem that has been dogging us for the last year or more. I started talking about it two years ago. I said, can we raise the rates a little bit, just a little bit to cool this off?
[00:08:04] But it didn’t happen. And so now we continue. It says banks face another problem in this high interest rate environment. They’re losing depositors. Investors want yield. They can pull their money out of the bank and put it in the money markets with a 5.5% yield.
[00:08:20] That is not great.
[00:08:22] That is a problem that I haven’t been paying too much attention to. And it’s only going to get worse as interest rates go up. I mean, why would you put your money at a bank when you could put it in Treasuries for a better percentage? It doesn’t make much sense.
[00:08:37] So I just wanted to bring this to your attention. I don’t think it’s getting any attention. At least I haven’t seen anything about it. And I just wanted you to be aware that this could be the problem.
[00:08:53] By the way, I don’t want housing to be a problem. I’d like everybody that has a job and has a decent credit profile to be able to go buy a house and afford one. I think what’s been going on the last little while has been terrible.
[00:09:11] But I don’t run things. I don’t run things. So anyway, be on the lookout. Well, how would we know if what Schiff is saying is true? Well, we’ll see more banks fail, that’s how we’ll know it. And then you could also question what the response will be from the Fed. Will they open up more liquidity, which should raise inflation, which would be a bad thing.
[00:09:41] But inflation is the worst problem you can have in an economy, in my opinion.
[00:09:52] It’s a tax on the poor.
[00:09:55] It’s vicious, and it’s hard to get rid of once you’ve got it. And as we’re seeing now, and people knew about this, the brightest guys in the room have known about inflation, and how they chose to handle that is not great. Not great. But that’s what I have on this.
[00:10:18] What do we got? We got a few more videos coming out soon. If you like this one, please hit the like button. Subscribe if you’re interested in real estate, financial talk. And that’s all I have. Thank you for watching. Thank you for listening. And I’ll catch you on the next one.