From todays’s WSJ, “Citigroup Feels Heat To Modify Mortgages; Nonprofit Groups Press For Subprime Relief; Deciding Who Gets Help”:

In Granada Hills, Calif., Natalie Brandon is fighting to keep the three-bedroom ranch house she bought in 1985 for $105,000. Mrs. Brandon, 51, does medical billing for doctors; her husband is a dispatcher for a local gas utility. Last year, she got a $625,500 mortgage from Argent, now owned by Citigroup. Her 7.99% interest rate isn’t set to rise until next June, but she already is behind on payments.Over the past five years, she has refinanced her home five times, each time taking out cash and paying prepayment penalties. Last year, all she had to do to refinance was state that she and her husband earned a combined $100,000. She says she used the proceeds to pay off $30,000 owed on her white Lexus.

This year, she says, their income fell after she suffered a short-term disability. Mrs. Brandon figures if she sold her home today, she wouldn’t get more than $450,000 — what a nearby home sold for in foreclosure.

Another sympathetic figure. She has borrowed (and spent) something like $550,000 assuming she put 20% down into a conventional mortgage in 1985. And now she wants a free ride. Literally.

Here’s another example, from the Irvine Housing Blog.

The asking price of $1,249,000 does not look like a rollback, but if the property actually sells at this price, the lender on the HELOC (Washington Mutual) will lose over $300,000.These owners will probably just walk away. I doubt they have any assets. They never put any money into the deal, they pulled out $333,000 in cash, and they got to live in Turtle Ridge for 3 years. Not a bad deal — for them.

Karma will not leave these people alone though. They have become accustomed to a lifestyle far beyond their means. Their house was providing them with $111,000 a year in tax-free income. When they get forced out, their credit will be ruined, and they will have to go from living the life of the nouveau riche to being a destitute renter. We can only hope this transition is painful and the memory of what they lost lingers for years.

These people likely drank the kool aid and actually believed this kind of lifestyle could be sustained. That level of ignorance makes it hard to have much sympathy for them. However, when you see the excess of this lifestyle, you can’t help but wonder if it was worth it.

If you knew prices were going to collapse, and the lifestyle was not sustainable (like many on this board did,) would you have done it anyway? When you see the lives led by people like today’s owners, it is not difficult to see why so many chose that life.

Coincidentally, both of these borrowers chose to supplement their incomes by borrowing about $110,000 each year. To net the same amount, they probably would have had to earn an additional $180,000 or so each year. They borrowed this money without any reasonable expectation of repaying it, or even being able to pay the full amount of interest from their incomes. True Ponzi borrowers.

Fear of price discovery is rampant in the banking system. Citibank and Bank of America are trying to fund a super-SIV to take over the assets of their “conduits.” HSBC, Europe’s biggest bank, today announced that it would support its two structured investment vehicles — Cullinan and Asscher — with funding of up to $35 billion to prevent forced sales of assets. The goal here is the same - to preserve “mark-to-model” pricing on assets that are probably nearly worthless if sold, despite high ratings. Buyers know that the ratings are essentially useless, because they can go from AAA to C overnight. Fear of that happening means no bids for the paper. The truth is, nobody really knows what this paper is worth because the multilayered and leveraged structures make it completely inscrutable. For example, structures like CDO-squared contain debt that has been sliced first in to MBS, then into CDOs, then into the CDO-squared. There is no direct relationship between the mortgages at one end and the payments at the other, because they are governed by the different tranches and their priority rules. Buyers don’t want a pig in a poke, especially when they know that the mortgages in the first place are probably under-collateralized.

So, not knowing how to solve this, they are trying to buy time. Writing off these securities or selling them in the open market is simply not an option, the hit to capital would be way too large. Cutting interest rates won’t help this problem, this is not a liquidity problem, this is a solvency problem. There is genuine fear that we could see a large bank fail.

Nouriel Roubini:

There are now signals of extreme illiquidity, risk aversion, credit worries and flight to safety in the US and Europe based on a wide ranges of indicators: swap spreads at all maturities (2, 5, 10 years), VIX and other measures of volatility and investors’ risk aversion, Libor spreads versus government bonds, Libor spreads relative to Fed Funds and other policy rates, TED spreads, Dollar and Euro Libor versus OIS spread, 3month Euribor versus ECB rate, Itraxx and CDX spreads, ABX and CMBX spreads, US 10yr Treasury yields below 4% and sharp fall of equivalent yields in Europe; sharp fall in short dated Treasury yields in the US, Europe and now even in Asia (Korea, China). Many or most of these indicators are now back to their extreme summer levels and some even worse.

And the futures are ramping higher on the strength of the positive spin on retail sales for Black Friday. Despite the evidence that people are buying less and were lured out by deeper discounting than ever before. It is hard to believe that stocks are at these levels under the circumstances. An unshakable faith in the omnipotence of the Fed, I suppose. We’ll see.

Well the annual how-great-everything-is hype about Black Friday retail sales is getting underway. No matter what happens, we know for sure that sales will be better than expected - they always are. It is pretty tiresome as the retailers and their shills - the moral equivalent of the NAR - try to pump up the “keep up with the Joneses” urge. The choice tidbit for me so far was:

“I’m really looking for the bargains this year because I’m losing my job,” said Tina Dillow of New Richmond, Ohio, who camped out at a Best Buy store near Cincinnati at 3 a.m. because of a great deal on a laptop. “They’re moving our plant to Mexico after the first of the year, so I have to be careful.”

Yes, right, Tina, being careful means saving money by buying a new laptop? If it weren’t so sad it would be funny.

Edit: And here comes the hype. “According to ShopperTrak RCT Corp., which tracks sales at more than 50,000 retail outlets, total sales rose 8.3 percent to about $10.3 billion on Friday, the day after Thanksgiving, compared with $9.5 billion on the same day a year ago. ShopperTrak had expected an increase of no more than 4 percent to 5 percent.” Never mind that ShopperTrak doesn’t track sales. They track traffic, using video cameras and image processing software. Then they project sales based on the traffic.” This is typical economic propaganda. ShopperTrak is guessing what people spent and then reporting it as fact.

Thanks to Calculated Risk., we hear Merrill Lynch’s David Rosenberg has committed himself to the recession camp:

With the tally now encompassing 90% of the companies reporting, third-quarter earnings per share dropped 8.5% from the third quarter last year. … David stresses that profits drive the business cycle — capital spending and employment feed off them. And he sighs: “It has always been thus.” Hence, he’s ineluctably forced to the conclusion that a recession in the economy “is either here or no more than two quarters away.”

I hadn’t seen this before, though it was worth saving:

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.
–Warren Buffett, Letter to Berkshire Hathaway shareholders, 2000