Wednesday, August 09, 2006

Overleveraged Buyers Squeezed

From Newsweek/MSN:

House Broke

When Shawn Howell saw the house in the summer of 2004, he thought he couldn’t lose. The location-close to family and in an upscale subdivision in Louisville, Ky.,—was perfect; the three-bedroom plus loft was just right. The price was a little high at $217,000—especially as Howell's wife, Niki, had just given birth to their second child. But the couple learned they could purchase it with no money down by taking out two adjustable-rate mortgages. The monthly payments would start at a manageable $1,100. And Howell figured the value of their home could only go up in the five years they planned to live there. Instead, two years later, the family have put their home on the market for less than they paid for it—desperate to find a buyer before the bank forecloses on the property. "Looking back, I wouldn't advise anyone to do what we did," says Howell, an Iraq war vet who worked two jobs but still fell short on the monthly payments after they jumped by more than $300. "We just couldn't afford the house anymore."

Across the country, millions of homeowners are finding themselves in a similar situation. Real estate purchases that once seemed like such moneymakers have become financial burdens instead. U.S. homeowners now owe about $9 trillion in mortgage debt. Of that, about $425 billion in adjustable-rate mortgages-initially pegged at historically low rates, but designed to shift with market trends after periods ranging from one to 10 years—will reset sometime this year, according to Freddie Mac, a government-sponsored housing financing company. Another $600 billion in home equity lines of credit (or HELOCs) and second-lien mortgage loans, which became popular when rates were low as a means of paying off credit card debt or financing home improvements, are also being readjusted. Those with fixed-rate mortgages payable over 15 or 30-year periods may be seeing little change, but those who banked on rates remaining near the 4.6 percent lows of 2003, are getting some unpleasant shocks when their mortgage bills arrive in the mail. As their payments rise, many are struggling to keep up. Foreclosures and delinquency rates are rising. And with the markets cooling in many regions—existing home sales across the country have slipped for three months straight and new home sales nationwide have declining as well—there are growing fears of a looming crisis. Howard Dvorkin, president and founder of Consolidated Credit Counseling Services, a nonprofit debt management organization, says up to 10 percent of those now seeking counseling are being squeezed by adjustable-rate mortgages or home equity loans. "And this is just the tip of the iceberg."

55 Comments:

Anonymous Anonymous said...

my oh my.

out come the grave dancers

8/09/2006 04:33:00 PM  
Anonymous Anonymous said...

At least that's one family dealing with the crisis. I don't know if you read Dean Baker, but he pays close attention to debt.

In each of the last two months (May and June) credit card debt has risen by about 10 percent.

People are compounding their bad debt problems.

Lindsey

8/09/2006 04:44:00 PM  
Anonymous UnRealtor said...

While I feel for the veteran, he really should have rented.

8/09/2006 04:44:00 PM  
Blogger grim said...

No sense pointing fingers.

The system failed, plain and simple.

1) From whom did these owners get the impression that house prices don't fall? Buyers should have been informed that buying a home is not a risk-free proposition. You can lose, big.

2) From whom did these owners get the impression that adjustable rate mortgages don't adjust upwards? I mean, the very name makes their behavior incredibly clear.

3) Didn't anyone question this purchase? Financial advisors? Friends? Did they do research?

4) $300 a month pushed these people over the edge. $300. Didn't anyone realize how risky this purchase was for them?

Everyone failed, the buyers included. Where was the advice, the guidance?

What happened to the mortgage guy behind the desk, pushing back the application while saying "I'm sorry, but I don't think you can afford this home".

The industry has gone from one with an incredible number of checks and balances to the equivalent of a casino that takes credit cards.

Who cares if you can or can't afford it, who cares if the loan is too risky, who cares if your debt is too high or income too low.

Here are the dice baby, all you gotta do is roll 'em.

grim

8/09/2006 04:52:00 PM  
Anonymous Anonymous said...

But meanwhile these people continue to shop and spend money.

One thing that has not slowed is consumer spending especially on clothes & back to school which will be another strong season continuing the strong retail trend that has been in place since 1998 with only a small dip immediately in the week after 09/11.

Of course these people complain & feel that they are entitled -- Typical Generation Y & the Echo Kids -- the most entitled, indebted, materialistic group in modern America.

No more handouts or bailouts. They will need to be taught a good but tough lesson

8/09/2006 05:00:00 PM  
Anonymous Anonymous said...

{{4) $300 a month pushed these people over the edge. $300. Didn't anyone realize how risky this purchase was for them?}}}

$300 is a pair of Jeans, a dress shirt or a cheap night out in Manhattan for the average person.

Most people spend between $2,000 - $5,000 a month in housing costs (either rent or mortgage) already.

8/09/2006 05:02:00 PM  
Anonymous UnRealtor said...

Following your point Grim, the buck should stop at the lender.

The no doc loans, the bumping of PITI ratios up from 30% to 50% in some cases, etc.

There need to be laws in place to prevent reckless lending.

Easily, over 50% of loans in the last 4-5 years should not have been granted.

8/09/2006 05:02:00 PM  
Blogger grim said...

Where are the checks and balances?

When did we lose all common sense?

And don't give me a line of bull about "enabling homeownership".

grim

8/09/2006 05:04:00 PM  
Anonymous Anonymous said...

{{{No more handouts or bailouts. They will need to be taught a good but tough lesson}}}

Maybe for some people. I wouldn't get by without the handouts. If it wasn't for the public library computers, I wouldn't be able to vent my rage and frustration. How else can I express my jealousy and envy of others?

8/09/2006 05:05:00 PM  
Blogger skep-tic said...

lenders understand the risk. they don't need to be nanny'd with artificial loan limits.

8/09/2006 05:13:00 PM  
Anonymous UnRealtor said...

"lenders understand the risk. they don't need to be nanny'd with artificial loan limits."


And who will bail the lenders out when they go under?

8/09/2006 05:15:00 PM  
Blogger grim said...

And just how many lenders hold the paper they originate?

jb

8/09/2006 05:18:00 PM  
Blogger skep-tic said...

"And who will bail the lenders out when they go under?"

hopefully nobody (though I see your point).

the industry will be purged and the strong will survive.

8/09/2006 05:18:00 PM  
Blogger BergenBuyer said...

If you clicked through the link, this important tidbit was in the article:

"U.S. homeowners now owe about $9 trillion in mortgage debt."

"Of that, about $425 billion in adjustable-rate mortgages...will reset sometime this year, according to Freddie Mac...Another $600 billion in home equity lines of credit"

"Fannie Mae, the country's largest source for home mortgage funding, estimates that nearly one-third of the total outstanding mortgage debt is set at an adjustable rate. So even more loans and mortgages will re-adjust in the next few years—and almost certainly in an upward direction."

Do the math-
- $9 Trillion in total mortgage debt
- 1/3 is set at adjustable rates ($3T)
-$425B Mortgage and $600B HELOCs and 2nd's adjusting this year ($1T total)
-Looks like that leaves $2T more to go after this year

I don't believe we've even started to see the effects yet of this year's resets, sure some people are squeezed right now and are starting to miss payments, but they're just starting to put homes on the market.

Supply will increase and demand will stay the same, price HAS to drop.

Patience.

8/09/2006 05:23:00 PM  
Blogger Rich52 said...

What I don't get is, if these people saved $0 before buying a house, what made them think it would be different after they bought? Especially when buying using I/O loans, and/or ARM's.

If these people truly believe house prices only go up, well, then they'll get what's coming to them.

8/09/2006 05:26:00 PM  
Anonymous Anonymous said...

does anyone remember the number
of state employees added over the
past 5 years. I was a big number.


Today,, the gov. of Alaska puts
a freeze in place the next day
after the pipeline problem.

Why can't we do that?

Logic ruled, not in NJ.

We add departments .

8/09/2006 05:30:00 PM  
Blogger BergenBuyer said...

"A $300 cell phone bill nearly cost Jacqueline and Danny Jackson their home in Lithonia, east of Atlanta."

I've got the simplest financial advice:

If you can't afford it, don't buy it.

If you can't afford to pay a $300 cell phone bill, GET OFF THE PHONE!

"Cassandra and Davey Parker took out a HELOC for $115,000 last June at a starting rate of 5.25 percent and used it to pay off car loans, credit card debt and the 6 percent fixed-rate mortgage on their four-year-old house."

"And it just keeps going up," says Cassandra Parker. "It's just like a different type of credit card."

The world needs ditch diggers, I'm sorry but some people are just dumb. You switched for 0.75%!!!

I gotta go, I'm getting too fired up over this.

8/09/2006 05:38:00 PM  
Anonymous Anonymous said...

We have $1 Trillion of resets this
year and a second Trillion next
year.

This is not going to be pretty.

Mortgage Apps. are down.
Interest Rates are up.

Where are the buyers going to come
from?

8/09/2006 06:01:00 PM  
Anonymous Anonymous said...

off topic,

flash: Manville, NJ

two egyptians students surrender in
Manville, NJ.

Another wonderful NJ town.

8/09/2006 06:10:00 PM  
Blogger Mr. Oliver said...

You got one right here, just biding my time, as are many of my fellow blog readers

8/09/2006 06:11:00 PM  
Anonymous Anonymous said...

Anybody over here notice a huge jump in land listings?

Pat

8/09/2006 06:25:00 PM  
Anonymous Anonymous said...

Something is up in PA with the land. Made listings jump.
Pat

8/09/2006 06:26:00 PM  
Anonymous Anonymous said...

{{{{"Cassandra and Davey Parker took out a HELOC for $115,000 last June at a starting rate of 5.25 percent and used it to pay off car loans, credit card debt and the 6 percent fixed-rate mortgage on their four-year-old house."}}}}

With the way most people spend money (especially in the NYC / NJ / Long Island Region), $115,000 is not enough for all three. Probably would barely cover Credit Card Debt + Car Loan for the average person.

And no, the 'system didn't fail'. Just stupid choices and a lack of responsibility and this ever present sense of entilement and blaming someone else.

8/09/2006 06:51:00 PM  
Anonymous Anonymous said...

And David Lereah caled this a normal market.

Wow!

His nose must be growing mighty long at this point.

8/09/2006 06:53:00 PM  
Anonymous Anonymous said...

{{{"Add in the increase in energy costs, the doubling of minimum payments on credit cards that went into effect in January, and it's the perfect financial storm for consumers," warns O. Max Gardner III, a bankruptcy lawyer in Charlotte, N.C., who specializes in mortgage servicing issues.}}}

But the NYC & Long Island media (NY Times, Newsday & NY Magazine) still think that everything is wonderful and that 'Strong Income Growth' will lead to another super strong holiday season.

You have politicans who think that everyone will pay a premium to live in this area so a middle class tax cut or elimination of the NYC Personal Income tax is never considered.

How do people do it in this region where there were ALREADY paying an average of $3,000 a month or more in TOTAL PITI + Commuting costs + Utilities + Gas + Groceries.
Is everyone either a suburban white collar single professional under the age of 35, or are more family DINKS?? (Double Six figure incomes and no kids)..

8/09/2006 07:00:00 PM  
Anonymous Anonymous said...

Pat,

I'm sure the builders walking away from their land options is a huge part of this. A lot of these seem to be coming due now. They realize that is is cheaper to walk away. Toll today said it would take write downs for the value of its land otions, deals that do not work in today's market. Is there a reason why they would not specify this value?? They will wait until they formally announce 3rd qtr results on Aug 22. Like they don't know the bad news now!!!!!!!!

BC Bob

8/09/2006 07:08:00 PM  
Anonymous Anonymous said...

NJ is no longer the place it was.
Someone was pointing out
that we have no great cities.

Paterson, Newark,
Camden, Trenton, Elizabeth, Rahway,


Ugh.

and its getting worse.

Your tax dollars at work.

8/09/2006 07:11:00 PM  
Anonymous Anonymous said...

I truly feel bad for the Iraq veteran, but good grief, what about common sense? Does it even exist anymore?

8/09/2006 08:14:00 PM  
Anonymous Anonymous said...

Grim,

I think some of your unrest lies in the decay of society. I always say..."if you really want to get to know somebody, look at their checkbook".

People have become too stupid, too lazy, too materialistic, too occupied with infotainment, sports, MTV, Oprah, and think things and life are just easy as pie, and the govt will always take care of me because I am an American...dumbasses....

Also, because of the Greenspan printing press, out came banks out of the woodworks, they popped up over night. Just like god damn Pottersville.

These banks have to compete fierce with eachother, so they just lend out the money, because if they don't, someone else will.

Just some more points to digest.

SAS

8/09/2006 09:11:00 PM  
Blogger chicagofinance said...

Ok - maybe it was the lead story, but -oh man- was this a negative thread. Please lighten up everyone.

:) :) :)

8/09/2006 09:21:00 PM  
Anonymous Anonymous said...

CF:
What the heck are you so happy about?

Hey...you been listening to little heartbeats? That always used to perk my husband up after a rough week.

;)
Pat

8/09/2006 09:29:00 PM  
Anonymous Anonymous said...

{{{ NJ is no longer the place it was.
Someone was pointing out
that we have no great cities.

Paterson, Newark,
Camden, Trenton, Elizabeth, Rahway,}}}

Most of NJ is the same as Nassau County on Long Island. An expensive, high taxed spawling 'Six & Seventh' boro of NYC that is nothing more than a large shopping mall.

I don't know what area is worse for rampant materialism.

Everyone comes to NYC on weekends anyway and spends thousands in clubs & at the stores in Soho, Chelsea & Fifth Avenue.

Except for Garden State Plaza, the Meadowlands Sports arena, & Great Adventure, there is nothing to do in NJ except shop, shop, shop & spend money.

8/09/2006 09:37:00 PM  
Blogger jayb said...

grim said...
Where are the checks and balances?

When did we lose all common sense?

And don't give me a line of bull about "enabling homeownership".

grim

8/09/2006 06:04:55 PM

When the US education system became one of the worst in the world. You can get your BS/BA and not know a single thing about basic finance and economics. BASIC!! Never been to China, but I'll bet my pants high school grads at an average school already know at least something about economics and finance.

8/09/2006 09:45:00 PM  
Anonymous Anonymous said...

i am in jersey city, nj. There are a lot of places up for sale and lots of people realy do go out and see them. But nobody is buying. No surprise to anybody here i am sure. After all i think we can all agree that the cost of ownership is just untouchable between prices and taxes. My question is about the "when". I have seen quite a few reductions but when will i see a drop of say 30-40 % where i can finally afford something with a conventional 30year loan?

One thing that concerns me about "when" it all happens is that there seems to be quite a bit of people, like us, waiting for this day. Wont it drive up costs again to have all of this demand? Or are we truly a smaller set of home hunters that could not possibly tip the scale towards another frenzy? The one thing that would help immensely would be the implementation of stricter lending guidlines.

8/09/2006 09:46:00 PM  
Anonymous Anonymous said...

Shytown,

Last time someone told me to "lighten up" and I took that advice, Operation Hastings broke out in the DMZ, and I got snagged by a bobby trap and I became septic as hell.

SAS

8/09/2006 09:46:00 PM  
Anonymous Anonymous said...

anon 8/09/2006 10:45:32 PM,

Let me tell ya, I have been to China on many occassions. Everytime I go back, I get more and more amazed about how advanced they are getting. If we don't wake up, they will own us someday.
Like I always say, thank god we have a strong military.

SAS

8/09/2006 09:49:00 PM  
Blogger Mr. Oliver said...

A strong military, yes, but with a clueless commander-in-chief.

8/09/2006 10:00:00 PM  
Anonymous Anonymous said...

{{{In each of the last two months (May and June) credit card debt has risen by about 10 percent.

People are compounding their bad debt problems. }}}

And the middle america media apologists like Moneycentral.com, and Time Magazine want people to think it is because the middle class is being squeezed.

I say this is utter BS. Stinking BS by these entitled limosine liberal apologists.

For most people middle class now means buying new clothes every day, buying a new cell phone every month, never eating at home, going on vacation once a month, having a BMW or Porshe by the time you are 25, having 150 channels on the TV, spending $1,000 every weekend on clubs with 'bottle service'.

In terms of employment, income growth & quality of life, things have never been better for the average American.

The problem is that we have become a self absorbed, materialistic, judgemental, materialistic society where one is judged solely by what they are wearing & the car they are driving. No where is this more apparant than in the NYC / NJ / LI area where the consumer culture seems more entrenched than anywhere else in the country.

8/09/2006 10:02:00 PM  
Anonymous Anonymous said...

Why do some of the people on this blog insist on saying that the "average" person in NJ is spending "$300 on a pair of jeans or dress shirt" or buying a "new cell phone every month". I live in an upper middle class town in northern NJ and everybody I know with kids looks for SALES in clothing and food, and uses COUPONS everywhere (whether clothes or food, etc.). The average person is NOT blowing huge amounts of money on clothing, "$1000s in clubs ", etc. every month.
So get a grip on reality!!!
NJ is just an extremely expensive and materialistic place to live in.

8/09/2006 10:23:00 PM  
Anonymous Anonymous said...

I live in an upper middle class town in northern NJ and everybody I know with kids looks for SALES in clothing and food, and uses COUPONS everywhere (whether clothes or food, etc.). The average person is NOT blowing huge amounts of money on clothing, "$1000s in clubs ", etc. every month.
So get a grip on reality!!!
NJ is just an extremely expensive and materialistic place to live in.

You contradict yourself Anon 11:23. You say that 'everyone looks for sales' and uses COUPONS. Then you say that NJ is an extremely expensive & materialistic place to live. No shit, it isn't any different than living on Long Island or in any of the 'Other 4 boros of NYC'.

When you leave Manhattan, the entire NYC metro area and most of the people seem to be the same whether you are in Bergen County or Nassau county.

But those who are as 'Hard up' as you claim, are moving out in droves taking huge equity gains with them. There is no reason to struggle here on less than $125,000 a year especially if you are single where the effective combined tax rate is one the highest in the nation with zero plans for any real tax relief.

8/09/2006 10:34:00 PM  
Anonymous Anonymous said...

Anybody an MLS "WTF" weirdness expert here?

A couple of hours ago, on the MLS were suddenly a bunch of land listings in Bucks County in prime locations. Developments, etc. Acres.

Now, they are gone.

?

Pat

8/09/2006 10:35:00 PM  
Anonymous Anonymous said...

Squeeze the "FOOLS".

In Every irrational market throughout history, there are always plenty of bagholders. many that have sold their houses will feel some of the pain since they stepped up to a more expensive house which will be declining and also the cost of running the larger McMansion.

Show & tell society is paying the piper now.

8/10/2006 07:55:00 AM  
Blogger NJGal said...

"You got one right here, just biding my time, as are many of my fellow blog readers"

Me too, but I'm not just jumping in, and I don't think there are as many of us as you think, at least in terms of people who will have a 20% downpayment and be able to qualify for credit. I still think that a lot of buyers bought - and bought condos, which they'll be stuck in because they'll have no one to sell them to when they try to move up.

8/10/2006 08:20:00 AM  
Anonymous UnRealtor said...

"A strong military, yes, but with a clueless commander-in-chief."


Olver, such comments are what derail threads.

I'd be happy to discuss, but this isn't the place, so let's stay on the topic of Real Estate.

8/10/2006 08:49:00 AM  
Anonymous UnRealtor said...

"The problem is that we have become a self absorbed, materialistic, judgemental, materialistic society where one is judged solely by what they are wearing & the car they are driving."


Travel south a bit, it's like another country with a different value system -- family and friends come first, pop culture and materialism come last.

I looked at real estate in the south, and most of the "high end" homes had at least one son/daughter in the service, or about to enter the service. I looked at a lot of homes, and it was impossible to miss the trend. These were the top neighborhoods.

A survey of "high end" neighborhoods in the Northeast shows most "rich people" up here don't believe in American exceptionalism, and instead view foreign countries as role models.

Interesting the difference a thousand miles can make.

Great real estate down there (well designed and built), but the jobs are not as plentiful.

8/10/2006 08:59:00 AM  
Blogger Mr. Oliver said...

Unrealtor,

I know, I know. I just couldn't resist. It was way too easy.

I'll try not to derail the discussion going forward.

Would want to disrupt the $300 jeans discussions!

:)

8/10/2006 09:07:00 AM  
Anonymous Danielle said...

http://www.msnbc.msn.com/id/14205351/

It looks like the forclosures are starting to rise now...

8/10/2006 10:01:00 AM  
Anonymous Anonymous said...

Unrealtor, I have family all over the south--Macon, Atlanta, Charlotte, New Orleans, (or what's left of it), Lexington, and other locales.

The idealized society you saw while shopping for homes in upscale Dixie names must have been hiding from me during my countless visits with kith and kin. My folk have their heads screwed on straight, but there's no apparent shortage of McMansions, Range Rovers, or upscale boutiques in the suburban shopping malls. And lots of people go to church wearing the dreaded $299.99 jeans.

And when it comes to American exceptionalism, I think you've unintentionally muddled countries and civilizations--I don't want America to be MORE like France or Canada (where they slather Freedom Fries with gravy and cheese curds, for heaven's sake!). However, I don't see the harm in expecting America to emulate other civilizations, places whence Americans came, and that continue to value, oh, I dunno, family and friends. I've traveled enough to know that this is a great nation among many great nations.

Euroland, for example, may be a soulless place full of man-purse carrying weenies, and where God's word has been used to line abortion clinic dumpsters, but from my experience, many of them at least know how to use resources wisely, turn off a television, know when to mind their own beeswax, or have more than one meal a week as a family.

Unlike you, I actually like life here in the old-world northeast. I've paid a premium to live here, and gladly so. Same goes for the many families with servicemen and women whom I am proud to call my neighbors.

8/10/2006 10:09:00 AM  
Blogger NJGal said...

"the old-world northeast."

Huh? Are you comparing the lifestyle of the Northeast to Europe? It's not the same by any means. Go ask some French guy riding his bike to work if he'd rather have a Hummer or an Italian woman on her way to market if she'd rather have Whole Foods, and see what they say. Then ask a 20-something in his BMW to take a walk instead to complete the test. Many in the Northeast may aspire to live the old world Euro lifestyle but we fail, and miserably.

8/10/2006 10:21:00 AM  
Anonymous Anonymous said...

Who said this is a Buyer's market now? Well heeled vultures are not yet finding any bargains:

http://tinyurl.com/zxplt

8/10/2006 11:46:00 AM  
Blogger grim said...

Very few people here believe it is a 'buyers market'.

grim

8/10/2006 11:55:00 AM  
Anonymous politely said...

Not sure there's been any failure in the system. I also don't think it's a conspiracy. Seems more like a case of a lack of common sense all around.

Also, it's pretty clear that these homeowners didn't have any equity in the home. Emotionally, it must be difficult, but practically speaking, it's almost the equivalent of losing a rental.

The big losers here are probably the MBS holders.

-P

8/10/2006 12:48:00 PM  
Anonymous UnRealtor said...

I can only go by what I observed while visiting the South.

People were so friendly, it took a few days to stop wondering "Why are they saying hello to me?" The answer: they're nicer people.

There are certainly McMansions and malls down there, but people in general are much nicer, more family-oriented than up here.

The phrase "the old-world northeast" illustrates a certain mindset/perspective, BTW.

And I never mentioned a dislike of the Northeast, but was instead explaining how we live in a varied and amazing country, which does not revolve around, nor care about, what occurs in the Northeast or California.

8/10/2006 01:31:00 PM  
Anonymous dreamtheaterr said...

Very interesting discussions going on here. When I first arrived at this blog a few months back to educate myself on real estate around NJ and life in general, I decided to hold off on buying for 2-3 years and try build a down payment. I see 2 of my work colleagues already regretting their condo purchases in the past year on ARMs.

The last month has almost convinced me to move out of this area to a lower cost place once my wife finishes grad school, and we get our permanent residency in the US (fingers crossed!).

The primary reason I am around here is that I can tolerate a lower standard of living (for now) and save more. I can't imagine getting crushed by PITI around here and dealing with a 4 hr daily commute for years to come. Once I have the freedom to get a job elsewhere, I'll move. Anyone on H1 visa on this blog might relate to the dearth of jobs in less populated areas.

I love being in NJ/NYC - such a diverse area. But its not worth it if my quality of life is going to decline to what it would be back in my home country! I'll have to chase the American dream in another state.... sad but true.

8/10/2006 02:27:00 PM  
Anonymous Anonymous said...

Always fascinating to discuss where the boundary between personal responsibility and lawmaking begins.

But for all you "let it burn now and we'll sort it out in the end" types, remember: in the end we're all dead. This is a bad mess, my friends, and if we don't act to fix it (and I agree with grim that we need to start with the lending /finance wolves here), we will be burned along with the fools.

If you really want to live in a society where we don't need pesky laws interfering with our freedom, go parachute yourself into the antarctic (while it's still unmelted) with a sterno and some canned food.

If you want to live in a society where the wolves don't win, laws and regulation are the most necessary of evils.

8/12/2006 02:45:00 PM  

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