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Thinking about "Economic Conditions"

Just How Many Guys Can Become Pregnant?

by Fred Cederholm

This financial Armageddon will eclipse the S&L mess, but this time Uncle Sam not only lacks the deep pockets, I’m not convinced he even has the pants!
I’ve been thinking about economic conditions. Actually I’ve been thinking about bailouts, freezes on rate resets, speculators, owner occupancy, property equity, current performance, and pregnancy. The RE mortgage bubble continues to pass gas. Billions of write-offs/ write-downs in carrying values have occurred, with mega-billions more to come. The mass marketing of the derivative paper behind these “pulse loans” (you have a pulse, you got the loan) have made this a global problem because investors worldwide got sucked into the euphoria of these highly questionable “investment” vehicles.

You see, last Thursday the President announced a coalition-type plan to “contain” the unwinding of the Sub-prime/Alternative-A loan debacle. The proposal is being marketed as a non-bailout, where a consortium of players will ultimately bear the heat—and the losses. This is bunk. This attempt to fix the mess will prove to be a half-hearted (make that lame) effort to buy some time before the grim rate re-setter ultimately triumphs. The S&L mess of almost two decades ago cost $500 billion, and the deep pockets of Uncle $ugar (make that the taxpayers) footed the bill. This financial Armageddon will eclipse that total and now Uncle not only lacks the deep pockets, I’m not convinced he even has the pants!

This super-hyped plan on the table—which has received worldwide press—proposes to contain the costs by limiting the eligible recipients. The plan proposes to instigate a 5-year freeze on the teaser rates in the effort to slow defaults, foreclosures, and financial misery. This is a good thing in principle, as any governmental intervention cannot be all things to all the injured and aggrieved parties. The conditions proposed make a lot of sense on an individual condition basis, but the big question—after all respective exclusions—is just who is left to reap from the stay of execution, or the pardon?

The first condition requires that the properties be owner-occupied. This excludes the speculators who gambled on the faulty premise that property values would continue to rise. Down the pike these real estate investment parcels would be flipped to someone paying an even higher price, the initial mortgage financings would be paid off, and a profit pocketed. Someone else would hold an even bigger mortgage, until they, too, flipped the property. This was the daisy chain I saw again and again in the S&L crisis. Estimates under this condition affect some 25% to 30% of the Sub-prime/Alternative-A pool of units.

How do you save a sinking ship that is already taking on water and listing to starboard or port? You don’t!
A second condition requires that any eligible property not already be in foreclosure. This too is a good criterion. How do you save a sinking ship that is already taking on water and listing to starboard or port? You don’t! We are already seeing the number of foreclosed properties approaching the excesses of the Great Depression. Numbers now vary by geographic market from one in a few hundred to one in thirty! The monthly numbers continue to soar. This will continue to be the case despite the plan proposed.

The third requisite mandates that the property have positive equity. This condition should all but eliminate any of the Sub-Prime/Alternative-A properties. The lion’s share of these started out being 100% financed. Many such “loans” financed the closing costs and fees as well—so they started out with negative equity. As this bubble seriously started to unwind—and pass gas—market values dropped. Since the beginnings of 2007 property values have declined 5%, 10%, or 15% across the board. In some of the worst markets, the decline already exceeds 20% for 2007 alone. Now....even if the property was only initially financed at 100%, or the subsequent flurry of the “equity” loans brought the property to 100% financed, the subsequent drop in market value made the parcel “up-side-down” and thus not eligible!

If you add that the current payment status be “performing”—with no history of late payments on the property’s ledger—to the aforementioned conditions and criteria, just how many players will be still eligible to partake of the 5-year rate freeze?

Let me put it this way...just how many guys do you know can become pregnant?

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.

Copyright 2007 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at

Copyright © 2007 The Baltimore Chronicle. All rights reserved.

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This story was published on December 10, 2007.