Mortgage crisis hits million-dollar homes
Mortgage crisis hits million-dollar homes
| Reuters

Tanta, if you are around could you comment on this?

Mortgage Grapevine: Fannie Mae LOVES Subprime 

I'm doing away with subprime for the most part. Fannie Mae DO approves everything these days. Just got a 100% purchase approved with a 509 mid score. Guy has $4,800 in collections that don't have to be paid, and one valid tradleline. He has Zero, yes ZERO verfied reserves. DTI's are only like 38%, but subprime lenders didn't even want this loan at 80 LTV. It's approved EA2, which means I'm getting him like 8% on a 30 year fixed, no prepay (3 Points YSP!!!). 2 months reserves would get him to an EA1. The MI is high at $500/month but my client is just happy to get a zero down loan! If you are a broker/loan officer that isn't using DO/LP, you are losing out on a lot of $$$$.
by paulyedward1 March 29, 2007

CR,

From the WSJ

However, as the housing and auto slumps have deepened while business spending has started to wane, economists are taking another whack at their GDP forecasts. Earlier this month, the consensus estimate of economists surveyed by The Wall Street Journal called for GDP to grow about 2.3% in the first quarter, down from an estimate of 2.5% a month earlier. The forecast for the second quarter was unchanged at 2.4%

A bunch of the interviewed guys are in the mid 1's.

Economists Cut Back Forecasts for Growth - WSJ.com

Here's a comment from the original commenter at broker universe:

Bernanke is already proposing to get involved to tighten up Fannie and Freddie but until then....

Sounds like the shysters have been loving Fannie and Freddie during the boom.

"How will the FED be able to reduce rates without the Dollar Devaluation?"

The BoJ and Ministry of Finance in Japan will soon orchestrate a PEARL HARBOR on those long the Carry Trade(Long GBP, EUR, AUD, CHINA, all emerging market debt) and short the YEN. In other words,the YEN will strenghten to the dollar and VASTLY STRENGHTEN relative other currencies.

This is a global phenomena that could force the FED in sympathy to reduce the Funds rate 200 BPS. Raise your cash levels now and BUY YEN!

This will perhaps unfold as leg 1 next quarter. YEN strenghtens and world equities plummet. Our USA flood in liquidity and asset inflation has been propagated by the FED and the BoJ's cheap YEN; however, the cheap YEN is coming to an END as it will be repatriated back into Japan debt and equity markets.

The unwinding of wave 1 & 3 of the YEN carry trade could push the DOW to 8800 and US bonds flight to safety rally in the 123's (3.5%)

A couple of notes about the Payroll stats. Those illegal aliens butchering the cows in Omaha were part of the 1M benchmark correction last Dec. The workers that replaced them were not only paid better but were counted. Those other illegal aliens in the construction industry may not have been fully accounted for by this tax receipts process, so no accurate registry of the actual residential construction jobs.
12M undocumented workers can make any attempt at accurate employment stats a bit of a hoot.

Another sector to report on: Semiconductor sales are down. Chipmakers have been calling a bottom the same as Home Builders.

- Herb Greenberg - MarketWatch

mikail: I've been thinking I need to move dollars into Japanese Yen. How does one go about it? Also, I don't understand how rising Yen, falling dollar could lead to interest rate drops in the US - wouldn't it be more likely that interest rates would have to rise here?

On the way up, the National Home Building Association boasts how it creates 2.5 jobs for one year for every building permit (one job in construction and 1.5 in associated businesses).
It is also an industry rule of thumb that one new job can buy one new home. A positive spiral in housing construction results on the up cycle as housing permits create jobs that buy the product they are building.

If the number of new jobs equals the number of building permits in a market area, then the area is considered to be in balance.

Most people I have read on the employment effect of housing, seem to miss the magnitude of the negative spiral on the down cycle. (one less permit = 2.5 less jobs = 2.5 less homes purchased and maybe 2.5 existing homes for sale)
A decrease of 1,000,000 starts will mean 2.5 million less jobs and 2.5 million less buyers.

People will continue to buy their daily lattes, go out for lunch, visit the theater, employ gardeners and housekeepers, get their nails done and visit day spas, and book trips as long as the money keeps coming in. Although in the aggregate these purchases are significant, individually they don't seem excessive to the consumer who doesn't budget assiduously. So this kind of economic activity is very durable.

This seems like pure wishful thinking. Instead you have to imagine a person who sees themself as having a certain wealth who may never have refinanced who may have other investments........and bit by bit all the wealth they think they have is declining in value. They will perceive themselves as becoming poorer. Expensive spending will be delayed until they feel richer. How can it be otherwise??

Reference yen carry trade:

mikail: I don't understand how rising Yen, falling dollar could lead to interest rate drops in the US - wouldn't it be more likely that interest rates would have to rise here?
bofizz

Bofizz, mikail's (an interesting name, btw, Russian intelligence is calling an American invasion of Iran for a week from today) analysis is slightly subtle.

He is saying that when the yen carry trade unwinds, the stock market will collapse, but those people lucky enough to get out of the market with portions of their skin intact and those with money to invest will flock to the American bond market.

Now, you are implicitly pointing out that the thing that has inverted the yield curve is the yen carry trade. And you are right. So, when it unwinds the long yields should go up.

mikail is saying that though that may be true, anyone with money to put anywhere is going to put it in American govt. bonds.

Personally, I think he's wrong. I think that foreign bonds will go up (and yields fall) without question, but I think that Treasuries will suffer horribly.

But I also completely disagree that the Japanese Finance Ministry is going to float the yen. That would be a particularly (forgive me) horrific form of hari kari. For starters, it would destroy the Japanese export economy. And, almost unquestionably, the Chinese export economy.

What I am struck by, is that if one of the Spanish-surnamed Americans who figure so prominently in analyses of the housing crisis were to call a broker at Merrill Lynch and say, "Look I want to go long on Dell this afternoon. I'll put up $5,000 and borrow $500,000," the click would come before they could complete the last "thousand".

But, the same SSA can call a mortgage broker and not even have to put up the $5,000 to buy the house.

In other words, the amount of leverage in the housing market makes 1929 look like a sunny day in a petting zoo.

And if the thing driving "consumption" is debt, well, c'mon, how does that work, to quote CR?

Amato,

Its a bit of a fallacy to say the consumer is holding up the U.S. economy. In reality the consumer is the CAUSE of the current slowdown.

What are the two biggest-ticket durable items that a consumer purchases? Cars and homes. It is their recent deferral of those purchases -- normal behavior during retrenchment -- that has caused both business fixed investment and residential investment to turn down.

The consumer continues to spend on items that can be easily financed with revolving credit (everything from clothes to plasma TV's). Rather than this being a "bulwark" against recession, its easy to view it as merely the next shoe to drop given dependence on MEW for paying down credit cards.

The bulls say rising incomes make up for lost MEW in paying down cc's. This may be true quantitatively (income gains = MEW lost), but the distributions don't match up: a 5% hourly raise for a family already stretching to make a credit card payment will not substitute for a planned-for $30k MEW windfall.

The bottom line is that the consumer has already started to restrict its spending. Its just that economists choose to look at it on an "ex-cars, ex-housing" basis.

FEDERAL RESERVE BANK OF SAN FRANCISCO
WORKING PAPER SERIES
The views in this paper are solely the responsibility of the author and should not be
interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the
Board of Governors of the Federal Reserve System.
Innovations in Mortgage Markets and
Increased Spending on Housing
Mark S. Doms
Federal Reserve Bank of San Francisco
John Krainer
Federal Reserve Bank of San Francisco
February 2007
http://www.frbsf.org/publications/economics/papers/2007/wp07-05bk.pdf
I found the above paper at the SF Fed. I found it interesting because

1. It shows the amount of MBS in private conduits
2. Increase in homeownership
3. Employment increase in Mortgage sector (though less steep a curve than you would expect due to to automation of the process)
4. Effect on ex-consumption (consumption expenditures go down) for home ownership.

My personal belief is that it is going to be mighty hard for the consumer to continue swinging. And, we all know that we can shop for and find a learned opinion that speaks to our concern.

Some might finding it interesting. There's much to be gleaned from some of these working papers, though I profess that the formulas lose me more often than not.

That San Fransico Fed paper

http://www.frbsf.org/publications/economics/papers/2007/wp07-05bk.pdf

The Abstract begins with:

"Over the past several decades innovations in the mortgage market have benefited consumers through a variety of channels. Innovations include the lowering of down payment requirements, increased flexibility in repayment schedules, and the reduction of costs associated with exstracting equity from homes."

Incredible. And whats more this was published last month!!