June's Consumer Confidence Index fell to 50.4%. It was the lowest monthly index number since February 1992. Consumers were concerned about rising energy and food costs as well as declining home values across the nation.

In addition, the latest S & P / Case-Shiller Home Index numbers for April '08 show a 15.3% drop in home values (20 major metropolitan areas) in a 12 month period. This was the biggest one year drop ever for this home index study. 

Las Vegas had the biggest one year price drop off with a 26.8% loss. Miami was second with a 26.7% drop in price, and Los Angeles was third with a 23.1% drop in price. California's median priced home dropped almost 30% between May '07 and May '08 (most of the drop off happened after August '07 - official start of the Credit Crisis).

MBIA's recent five level credit downgrade (still not enough potentially) may force MBIA to make another $7.4 Billion in payments and collateral postings (per Bloomberg).

MBIA may have up to $15.2 Billion of assets available to satisfy these new asset requirements. These numbers may include $4 Billion in cash, $1 Billion in unpledged assets, and $10.2 Billion in "other securities". Are these "other securities" CDOs, Credit Default Swaps, SIVs, or other assets? As these investment markets still remain fairly "frozen", MBIA and other bond insurers may not be able to convert these assets to cash for anything more than 20% - 25% of the face amounts.

The true hidden risk to our world's financial markets is tied to the unwinding (or unraveling) of these complex derivative investments, the current and future credit rating downgrades on these "overvalued" assets, and the lack of liquid cash worldwide.

Between May 2007 and May 2008, the median priced home in California fell almost 30%. In May '07, the median priced home in California hit a record high of $484,000. 

In May '08, the median price fell almost 30% to $339,000. $339,000 is roughly the same median price as in May 1995, which was an awful economic year for the state 13 years ago.

When the Credit Crisis officially began in August 2007, the median price started to fall significantly. In fact, most of the 30% decline in value happened within just 9 months (August '07 - May '08). With foreclosures escalating (2,000+/per day in California alone) and lenders continuing to tighten their guidelines, we may expect to see further drops in median values.

Citigroup's Chief Financial Officer, Gary Crittenden, said today that Citigroup may report significant 2nd quarter '08 writedowns or losses due to their "subprime exposure". You may expect several billion dollars in new losses from Citigroup within the next few weeks.

Citigroup and JP Morgan Chase probably hold more investments in complex derivatives like Credit Default Swaps (CDS), Collaterized Debt Obligations (CDOs), and SIVs (Structured Investmnet Vehicles) than any other firms on Wall Street. Their investments (hedged or not) may potentially tie up hundreds of billions (or trillions) of dollars of compex derivatives which may now only be worth a small percentage of their face values. Once these banks acknowledge their true risk exposure and actual losses to date, then you may see a larger drop in the values of these banks.

Since the start of 2004 and through the 1st quarter of 2008, here is information (originally published by Blloomberg & The New York Times) which shows the following banks total "acknowledged" writedowns as compared to their reported earnings. Remember, I believe that these same banks have underreported their true losses SIGNIFICANTLY TO DATE so these loss to earnings ratios may be much worse.

Investment Bank:             Losses as a % of Earnings:

1.) Merrill Lynch                         153% (Negative)
2.) Lehman Bros.                         58%
3.) Morgan Stanley                      50%
4.) Citigroup                                57%
5.) JP Morgan Chase                    15%

Just wait until many of our banks begin to report the real "actual or potential" losses due to their true risks associated with credit markets around the world. Many banks and investment banks may go out of business if they are not "nationalized" or taken over by the government.

John Paulson, the well known Hedge Fund manager who made billions last year shorting the sub-prime mortgage index, predicts $1.3 Trillion in bank writedowns due to non-performing mortgage loans.

Paulson predicts that the 2nd half of 2008 will be worse than the already horrific 1st half of '08. He also believes the Credit Crisis will continue on well into 2009. 

Paulson also made a comment in regard to the troubled bond insurance company - Ambac Financial Group. Ambac is one of the largest bond insurance companies in the U.S. They typically "guarantee" any missed principal and interest payments in many of these Collaterized Debt Obligations, Credit Default Swaps, or other forms of derivatives for many of the largest banks and Wall Street firms in the world. 

Paulson thinks that Ambac is too leveraged with debt and credit risk, and that their cash reserves are much too low to cover any significant future losses for their clients. If Ambac's AAA credit rating is downgraded soon to "junk" status, then more banks, Wall Street firms, and Hedge Funds may need to bring in additional cash reserves due to the reduced bond insurance protection. 

As I have said 1,000 times, the Credit Crisis is primarily about the unwinding of assets in the world's "shadow banking system". The deleveraging of leveraged and hedged assets (SIVs, CDS, CDOs, etc.) is what this Credit Crisis is all about. It is not just a "subprime" problem!!!

No kidding!!! U.S. Banks may need to raise hundreds of billions in new capital as the housing market continues it's downward descent, and the unwinding of the world's "shadow banking system" continues with the unraveling of CDOs, Credit Default Swaps, and SIVs (Structured Investment Vehicles). 

Leverage can be a great thing during the boom times. When things bust, leverage can be your worst enemy. When Long Term Capital Management busted in 1998, it was one of the largest Hedge Funds in the world. They had $3 Billion in investor capital. With the $3 Billion in cash, they tied up $124 Billion in derivative investments and another $1.25 Trillion in "off balance sheet investments". 

Today, there are over 10,000 Hedge Funds worldwide. These investment funds and most of the world's largest banks and investment banks are heavily invested in unregulated derivatives like Credit Default Swaps ($45 - $62 Trillion worldwide). They are also investors in billions of dollars of AAA rated Collaterized Debt Obligations (pools of prime and subprime mortgages). Many of these non-performing mortgage pools should be rated as "junk bonds" (BBB or below). 

Goldman analysts predict that the mortgage losses may continue through the 1st quarter of '09 so they expect more banks to raise capital so they remain solvent. Aren't the Fed's Term Auction Facilities helping banks replenish their diminished capital base or is it not working? The unwinding of the world's financial markets continues, and I expect a long, bumpy ride.

The Newport Beach based thrift ($13 Billion in assets) released data which shows that 14.3% of Downey Savings' mortgage loans were "non-performing" in May '08. In April, the number of "non-performing" mortgage loans was 1% less at 13.3%.

Downey's stock values have plummeted almost 90% in just the past year partly due to investors concerns about the financial health of the thrift.

Downey Savings was one of the most aggressive prime and sub-prime adjustable mortgage lenders over the past decade plus. They offered low FICO credit score option pay ARM loans to many of their borrowers. These same borrowers now may not have the cash reserves or equity left within their respective properties to make their mortgage payments.

May 2008's foreclosures were up 48% nationwide as compared with May 2007's numbers. As I have written before, the record foreclosures are becoming the new sales comparables for many neighborhoods. This is especially true in the "bubble" states like California, Nevada, Arizona, and Florida.

The record setting foreclosures may reduce sales prices in many neighborhoods, which may cause more existing homeowners to have zero or negative equity. The lack of equity may cause more homeowners to walk away from their homes as they have less reason to pay their payments on time due to the loss of equity. This "vicious downward cycle" (or "negative feedback loop") of foreclosures causing more foreclosures may be the number #1 factor causing home prices to decline significantly. 

Foreclosure resales are also becoming the main type of real esate sales activity in many parts of California, Arizona, Nevada, Florida, or other regions. These reduced bank REO sales may have a greater impact on property values than other economic factors like interest rates, the local job market, or current or future inflation (or deflation) levels.

According to data released by http://mrmortgage.ml-implode.com & Foreclosure Radar (two excellent websites, blogs, & foreclosure analysis companies), over $10.4 Billion in loans were taken back by the banks in May alone in California. Unfortunately, a high percentage of these same properties had junior liens or loans (2nds or lines of credit) completely wiped out at the final Trustee's Sale as well. This dollar amount was 9% higher than the previous ALL TIME record set one month prior in April.

Many of these new bank REOs (Real Estate Owned) may later re-sell for only 60% of the bank's loan balances. These new lower sales comps will then establish the new sales comps for most neighborhoods in California. The bulk of home sales in our state in recent times have primarily been REO sales at significantly lower prices. Unfortunately, these new lower prices hurt everyone in the immediate area. 

There were an additional 43,011 new Notice of Defaults (NODs) in May as well. NODs start the formal 111 day foreclosure process for a homeowner who is typically 2 to 6 months late on their existing mortgage payments. The average daily foreclosure filings now are 2,009 PER DAY in California. I had recently written in various publications that they were only 1,000 per day. Now, the number of foreclosures filed EVERY DAY is DOUBLE that number. Nationwide, there are now over 1 MILLION properties in foreclosure right now.

The vast majority of homes in foreclosure now are going all the way to the final Trustee's Sale. Over the past 4 to 6 months, banks took back an average of 97% to 98% of these properties as there were few third party investors wanting these properties. A high percentage of these homes had little or negative equity so they did not appeal to outside investors. 

There were a record 34,564 properties that had Notice of Trustee's Sales filed against the homeowners in May alone. The Notice of Trustee's Sale is filed 90 days after the initial Notice of Default. 25,523 homes went all the way to the final Trustee's Sale in May as well. Each month, the foreclosure numbers seem to get worse. 

Expect significant value reductions in most parts of California due to the new "market makers" set by REOs in most neighborhoods. Don't expect any rate hikes from the Fed anytime soon as asset values keep falling unfortunately. The "vicious downward cycle" of more foreclosures is causing more negative equity for existing homeowners. These same homeowners with negative equity are more likely to walk away from their homes, which causes further downward price pressure for the rest of their neighborhoods. (SEE VIDEO #1 IN THE VIDEO LIBRARY FOR MORE INFORMATION)

Trans Union, one of the 3 major credit bureaus, released information today which shows that mortgage delinquencies nationwide have now increased for the 5th consecutive quarter. Between the 1st quarter of 2007 and the 1st quarter of 2008, mortgage delinquencies nationally increased over 61%.

Since the onset of the Credit Crisis, few lenders these days will provide refinace loans to homeowners with a recent 30, 60, or 90 day late payment. With the decreasing values in many parts of the U.S., the loan options for delinquent property owners are now few these days. Private money loans may be a possible option for delinquent property owners if the current loan to values are fairly low (under 70% LTVs).