Lehman Brothers just announced a $2.8 Billion dollar loss for the 2nd quarter of '08. It was this first reported loss since going public in 1994. Lehman Bros. is the fourth largest securities firm on Wall Street. Lehman and Merrill Lynch may both have the biggest exposure to both sub-prime and Alt-A credit mortgage loans in the U.S.

This morning, Lehman's stock shares dropped over 11% in value. Lehman had sold over $130 Billion of assets in the 2nd quarter in order to shore up their capital reserves as well as to reduce their future losses. 

Many Hedge Funds are currently "shorting" their positions in Lehman Bros. as they expect Lehman's losses to widen and, as a result, their future stock values to drop even more. If you "short" a stock, you profit when the stock declines in value. I hope that Lehman Brothers can survive and not need a Bear Stearns style bailout from the Fed as well.

Fitch, one of the 3 largest Credit Rating Agencies, just downgraded both PMI (Private Mortgage Insurance) and MGIC (Mortgage Guaranty Insurance Corporation). PMI and MGIC are the companies that insure lenders (banks, secondary market investors, etc.) against losses from a non-performing or foreclosed property.

Typically, PMI and MGIC are used when the 1st mortgage for a loan exceeds 80% loan to value at the time of the closing. With values in many places recently falling 20% or more, millions of homes across the U.S. are currently "upside down" with negative equity. Homeowners are more likely to walk away from their homes that have lost all of their equity.

PMI and MGIC are usually the ones who cover the losses for the lenders due to the defaulted mortgages. As a result of record forelosure losses nationwide, the cash needed to cover these defaulted loans has reduced the cash reserves for these mortgage insurance companies. Due to the lower cash reserves on hand and the increasing risk of future mortgage losses, the recent credit downgrades for PMI and MGIC seem to make sense.

Moody's, one of the top 3 credit rating agencies, is planning to downgrade two of the three largest bond insurance companies in the world - Ambac & MBIA. These companies have maintained their AAA (highest and safest credit rating) even though the Credit Crisis is continuing to make their financial exposure even more dire. 

Some people on Wall Street believe that both Ambac & MBIA should have "junk" bond ratings of BB or less as their cash on hand is thought to not be anywhere near the minimum reserve levels needed to protect against their client's losses. 

These clients may include major banks, Wall Street firms, and Hedge Funds. Each of clients pay insurance premiums to Ambac, MBIA, or other bond insurance companies in exchange for a "guarantee" that these bond insurers will cover any principal and interest losses if the contract payor is not able to make the future payments on their Collaterized Debt Obligations (CDOs), Credit Default Swaps (CDS), or some other form of Mortgage Backed Securities, credit card "pools", or other receivables accounts.

If the bond insureres can not cover any losses for their clients down the road, then the overall financial losses around the world may only escalate. The hidden danger in our "shadow banking system" lies within the stability of bond insurance companies, credit rating agencies, and complex derivatives such as Credit Default Swaps (CDS - estimated to be as high as $45 to $62 Trillion).

Fed Chairman Ben Bernanke recently spoke about the Fed's determination to strenghten the U.S. Dollar. As the Dollar has plunged to all time lows in recent months, this is assumed to be a signal that the Fed is done with reducing short term interest rates any further.

While it is important to strengthen the Dollar against the Euro, Pound, Yen, and other currencies, the Fed needs to watch out for both inflation and deflation. We are in a period of time right now (a mini-Hyperinflation) where consumer prices are increasing, and asset prices are decreasing. 

What is worse for the U.S. economy? Inflation or deflation? We are experiencing both just like Japan has for almost the past 18 years. As the Credit Crisis may worsen, the Fed may be forced to ditch their plan to strengthen the Dollar and keep cutting rates even more. We shall see what happens at their next few meetings scheduled for June 24th and 25th, August 5th, September 16th, and October 28th and 29th.

There has been a significant drop of 27% in the median price of California homes over just an 11 month time period (through the end of April '08). The enormous equity losses will cause a higher percentage of existing California homeowners to have negative equity within their property. As a result, a high percentage of these homeowners will probably walk away from their homes. This will only increase the potential value losses even more.

Over the past 5 or 6 years, the average California home buyer invested between ZERO and 10% down on the purchase of their home. If their home has dropped in value 20% or more, then they may have no equity left within their home.

A very high percentage of California homeowners either purchased or refinanced their properties via a "Stated Income" type "Exotic Loan" (i.e. option pay ARM, 5 year fixed interest only, 80/20 1st and 2nd). As few people could qualify for the high California loan amounts, many Californians could only afford a smaller down payment adjustable rate product.  The vast majority of these "Stated Income" adjustable rate products have now disappeared due to the high default rates. As ar result, less people will be able to qualify for a new mortgage loan. 

It was recently reported that Los Angeles was the least affordable metropolitan city in America to purchase a home. These statistics take into account the current median home price and the median household income for the region. Based upon these basic price and income numbers, the study's creators concluded that just over 10% of Los Angeles residents may qualify for a new loan. With most "Stated Income" loan products having disappeared over the past 6 to 9 months, this will be a real problem for Los Angeles residents and others who live in our great state of California.

According to an article published by Reuters, 3 out of every 4 homes located within the city of Stockton, California are currently in foreclosure or headed toward foreclosure. The vast majority of homes currently listed for sale in Stockton (Northern California, East of San Francisco) are distressed properties. 

Many of these homes once sold for $500,000 plus in recent years. Now, some of these same homes are selling for $200,000. Will Stockton set the precedent for future "bubble market" cities located in other parts of California, Arizona, Nevada, or Florida? We shall see as lenders continue to tighten their guidelines, and credit card companies do the same. The Credit Crisis continues to cause hyperinflation with consumer prices, and rampant deflation of hard assets like real estate.

Robert Shiller, the co-founder of the national Case-Shiller Home Price Index & a Yale Professor, reports that the 14.1% home price decline over the past 12 months (in 20 of the top metropolitan markets) is now the greatest drop in annual national home prices than in 1932 (or any other year). 

1932 was considered the worst economic year during the Great Depression (1929 - 1939) as that was the year when the banking crisis significantly worsened after the stock market crash began in 1929. "Runs" on banks became fairly common (think It's A Wonderful Life) as panicked bank customers stood in long lines in order to withdraw all of their savings from their local community banks which teetered on the verge of insolvency.

Home values dropped an average of 10.5% in 1932. In terms of dollar amounts lost, many homes were valued at only $4,000 or $5,000. A 10.5% drop in home value then was equivalent to a drop of close to $400 or $500, which is about the same amount of money that I spent at my local gas station the past few weeks. 

Standard & Poor's downgraded almost 66% of Alt - A Credit (most FICO scores above 700) 1st mortgage loan pools which funded in 2007. They also downgraded 96% of Alt-A credit 2nd mortgages which funded in 2007.

The downgrading of credit risk from the laughable AAA (same as a "safe" U.S. Treasury Bond) to a BBB or BB ("junk" status) may cause the value of these mortgage pools to further decline as less investors may want to hold or purchase these mortgage pools.

In the "bubble" states like California, Arizona, Nevada, and Florida, a very high percentage of "A" credit loans were funded with no income verifcation through an Alt-A type mortgage loan. Many of the largest loan amounts in California are Alt-A loans.

As most Stated Income, Alt-A loans have now disappeared (option pay ARMs, 5 and 7 year fixed, etc.), most homeowners may not be able to refinance their existing loans which may cause more homes to flood the prime Southern California housing market locations such as in areas near the coast. 

The Alt-A Credit Crisis continues to worsen each day, and it will probably be significantly larger in terms of total dollar amount losses than the Subprime meltdown. You may see prime coastal properties begin to drop in value between 20% to 40%+ over the next year or two due to the ongoing Credit Crisis.

According to Nouriel Roubini's RGE Monitor website (one of the best economic and financial sites around), the average American's household debt to disposable income levels are near 138%. This figure rose from 100% back in 2000. 

At 100%, the average American household is spending ALL of their income. At 138%, the average American household is spending 38% more per year than they are earning in income.

American consumers' reliance upon their home equity lines of credit (2nd mortgages) and credit cards to cover their day to day expenses is now changing dramatically. Most American banks are "freezing" their customers' lines of credit as well as not issuing any new 2nds to their clients due to the record high default rates.

In addition, the ongoing Credit Crisis is now severely impacting the credit card securitization market. As a result, most lenders are tightening their underwriting guidelines for new credit cards or they are reducing the allowable outstanding balances. 

With sky high hyperinflation now hitting the U.S. in the form of higher energy, food, and other consumer staple prices, the debt to income levels may only worsen for the average American family. Hyperinflation, in turn, may fuel a significant downturn in asset prices like real estate and stocks.

The Standard & Poor's / Case - Schiller Home Price Index just dropped 14.4% over the past 12 months in 20 major metropolitan areas. This is the biggest drop in combined values since the Price Index was created in 2001. 

Unsold home inventory levels and record setting foreclosure numbers continue to increase which, in turn, causes home values to further plummet in many regions like California, Arizona, Nevada, and Florida.

The drop in home prices is forcing more lenders to "freeze" their existing credit lines for home owners as lenders are concerned about the potential for zero or negative equity in many of these properties. The drop off in home values is also causing consumer spending to slow down. The declining home values and consumer spending may keep us in a prolonged recession for quite some time.