Yes. And, apparently, because of losses on derivatives intended to hedge fixed interest rate risk, not on credit losses.
So question one is, what happens when the credit losses get worse? Will they be offset by hedge gains?
Question two is, for everyone who wants to reduce credit risk by getting borrowers out of ARMs (where the borrower takes the rate risk) and into FRMs (where the lender takes it): how, then, do you mitigate the rate risk you just traded for the credit risk?
WOW! Even Freddie is buying back bad loans and it is supposedly not exposed to subprime borrowers. Also, no explanation for derivatives losses. Can anyone here explain the losses?
WOW! Even Freddie is buying back bad loans and it is supposedly not exposed to subprime borrowers.
Do we know that from the article? It said 16% of their purchase portfolio were "non-traditional"
Freddie Mac has been an active buyer of some of the non-traditional mortgages that were part of a general loosening of lending terms in recent years. Loans that allow the borrower to pay only interest for a time, without reducing principal, accounted for 16 percent of the company's mortgage purchases in 2006, a total of $58.2 billion, the report said.
Depends on what non-traditional is & were they part of the buy back pool.
Their market position allows them to be fully hedged, no?
I guess it depends on what you mean by "fully hedged." The older I get the more suspicious I am of that concept. They should be very well hedged. As well as anyone can be hedged.
Tanta also asked, "how, then, do you mitigate the [adjustable to fixed] rate risk you just traded for the credit risk?
Perhaps we are a the top of the rate increase cycle and getting borrowers into fixed rate loans is the hedge. Remember, Uncle Al recommended borrowers adopt ARMs at the bottom of the last cycle to hedge against another S&L like debacle.
Does an inverted yield curve eventually create losses for financial institutions? Is there a way the banks have been hedging this risk or is it just a matter of time before the losses show up?
"The yield curve is particularly important to financial institutions because banks and securities firm borrow money at short-term rates and lend at long-term rates. A flat yield curve, therefore, squeezes margins. An inverted one hurts a bank's profits."
Tanta followed with, "[s]o what happens when borrowers can't afford to fix the rate at the top of the cycle?"
In addition to regular refinancng fees, charge more fees -- workout fees, loan conversion fees, insurance fees, copying and faxing fees, my dog ate the paperwork fee.
That 1930's clip was quite interesting. The construction sites showed more workers on site than you see today. There's a lot of pre-fab framing and roofing on modern homes.
The couple touring the model home got to look all around without a Realtor following them! Heh. Although I'm sure even in the 1930s there were salespeople.
Anyway, hang on to the last bit... the sign outside said payments of $27 a month. Woo-hoo! 1930's houses for everyone.
The big difference in that old propaganda video compared to today was when the announcer said "now they can buy the house for less they spend in rent". Where can you do that today?
Check out today's heading today's headline in Charlotte Observer. Apparently, after the second printing of 4 day series on rising foreclosures, HUD and FHA are going to review Beazer Homes.
Just MAYBE there is a conflict of interest, when the builder acts as its own broker? Was this an ISOLATED incident, ONLY in Mecklenburg and Cabarrus counties?
In addition to regular refinancng fees, charge more fees -- workout fees, loan conversion fees, insurance fees, copying and faxing fees, my dog ate the paperwork fee.
But Uncle Al, it only takes me 12 seconds to decide to lose money on a loan. Don't I have to pass this cost savings onto the borrower?
"now they can buy the house for less they spend in rent". Where can you do that today?
Would you believe that was the main reason why people used to buy houses? Tying up a down payment in return for improved monthly cashflow? What a concept.
"Families are finding it hard to stay in their homes as deteriorating house prices, regional job losses and increasing mortgage payments are making their homes less affordable," chairman and chief executive Richard F. Syron said in a prepared statement.
Excuse me? Why would dropping house prices make a house you have already bought less "affordable"? Unless you couldn't really afford it in the first place, and were counting on rising prices to bail you out upon sale or refinancing.
The big difference in that old propaganda video compared to today was when the announcer said "now they can buy the house for less they spend in rent". Where can you do that today?
Northeast Minneapolis. At least, we could when we bought this house eight years ago. 30-year fixed mortgage payment of $904, including taxes and insurance, for a 2400 sq ft duplex. We rent out the bottom half for $700 a month, which is underpriced because we get the tenants to do the yardwork.
That implies rental costs of $1400 for the whole place, or $500 more than the mortgage payment.
J. Michael Neal, what is the ratio of price/rent today?
Out west the cap rate is soooo low, it is not worth looking at property until the price goes down 40-60%. Until then, renting is one of the best arbitrage opportunities around.
Yes, a $1B decline/quarter does sound like an expensive trend for anybody. Compare and contrast Fannie whose position is unstatable (might as well cut to the chase and fess up that some of us believed them when they said their statements would be postponed) but whose 30% reserve requirements may have saved them from taking on some of this "unproductive" volume.
Is FRM/totalM the major brake on rising FF rates --not those consumption views (CPI) of inflation?
Are the banks heavily hedged against that possibility (interest rate swaps) hoping there are counter parties taking the other side that lower interest rates will be necessary to spur consumption? [And hence the risks are spread and the derivative instrument, interest rate swap, is said to "disintermediate" the risk.]
Good thing there is a difference of opinion on future interest rates and the parties aren't unanimously on one side of this issue, no?
Payments less than rent is what I would expect to be possible in a normal market, with a 25% down.
My own house with 20% down was roughly equivalent to rent in Charlotte. I expect it to tip in my favor by next year, due to the advantage of fixed rate financing.
I have one rental at 135 GRM. I could probably raise the rent a little, but I like the fact that tenants don't move too often, when they're getting a decent rate. My last ones stayed a year and a half.
Are you sure Freddie's numbers are correct? What about Fannie's? Why aren't they current with their financial filings? What are they hiding? Why aren't SEC or exchanges suspend their listing b/c of their accounting misdeeds? B/C they are too big to fail! Bunch of cheaters, schemers, conspirators! Examples of free market enterprise!
The big difference in that old propaganda video compared to today was when the announcer said "now they can buy the house for less they spend in rent". Where can you do that today?
About 80% of the surface area of America fits that description - they just don't happen to be on either coast or a fast growing interior city.
I mean how important is it to own a home? If it is really important & they can't afford it where they are... then move. Otherwise rent. Renting isn't the end of the world.
Free enterprise and market efficiency are only textbook theories! What we are witnessing are market manipulations and deficiencies created by these cheaters with full blessings and encouragement from the very people who are supposed to provide oversight to all these illicit activities. We now have witnessed two back-to-back bubbles and the continued supportive arguments for these bubble facilitators are just incredible!
J. Michael Neal, what is the ratio of price/rent today?
Not much different. Not in Northeast. Minnehaha creek part of Minneapolis maybe... or Crocus Hill & Highland Park in St. Paul. But for most of older urban Twin Cities... you can buy for about what you can rent. There are lots of 3 br homes in the $150K-$200K area... run a 30 FRM on those and you can easily beat the same house as a rental.
Again we aren't talking the hottest up trend neighborhoods... but not ghettos either.
Go outstate like where I live and its even cheaper. You can buy homes in my sleepy little river town for $100K.
Long-time reader, first post. CR and Tanta, thanks for all the fine help over the past nine months. No quarrel with your observaton that Freddie CEO Richard Syron is a former central banker, but one quibble. Here's the relevant section of his bio:
"Prior to joining the Amex as chief executive officer, Syron held senior posts in the banking sector including top positions at the Federal Reserve Bank of Boston and at the Federal Home Loan Bank of Boston. During his time at the Federal Reserve from 1989 through 1994, Syron helped shape monetary policy as a member of the Federal Reserve Board's monetary policy making Federal Open Market Committee. Syron also was sponsor of a landmark study on racial discrimination in mortgage lending during this time, and was the key figure in the restructuring of New England's banking system following the strains from the 1980s and early 1990s".
On February 28th, discussing Freddie's new, tighter lending standards (end to purchases of no doc and stated income from September 1st), Syron said "the last thing you want to do to that [sub prime] market is take out a major purchasers overnight. I saw the New England credit crucnh as president of the Boston Fed. Everyone turned off the spigot all at once, and it's a very, very unhappy result".
In other words, Syron has lived through the eye of one hurricane, and thus has experience of what lies directly ahead. Whether the spigot is turned off all at once, or merely slowly, the end result is actually the same.
The bogeyman that people (ex this an other Blogs which have nailed the non-prime bust, both in its extent thus far, and most importantly timing) - seem to have forgotten is housing inventory. I read somewhere recently that non-traditional loans were behind as much as 70% of housing demand in California over the past two years.
That may be right, but it does sound a little high (happy to be corrected on this). Let's assume that the real number is 50%, or even 40%. Over the past two years housing inventory in parts of California has doubled, even tripled, and continues to rise. What happens if 100% of that 40% are unable to refinance, either outright or on the same terms? How on earth do you shift all those houses? Increased inventory means prices will decline, this crimps consumer balance sheets, which crimps consumer spending, which crimps the economy, which makes house prices go down. It is not easy to see a circuit breaker for this one, nor a happy ending. The trick is realising all this may take some time to play out.
The housing market peaked in July 2005, right when Robert Toll started flogging shares in the company he created. It took a year for the stock market to get it, but then crude dropped $20 and everybody decided the world was a happy place: housing didn't matter. Ironically, right at that moment, the first problems bubbled to the surface in non-prime, and in early September, one investor put on a sizeable short position i
I'll tell you what I'm really sick of is hearing people explain that in the main stream press that "deteriorating home prices" is one of the factors "making their homes less affordable". Argh! Declining prices don't make your home less affordable unless you are playing musical chairs with lenders AND it was already unaffordable to begin with.
..put on a sizeable a short position on in the ABX.HE.06-02 BBB-. The hint that something was really awry was when spreads on the single A pieces of the ABX.HE.06-02 started widening sharply in the middle of January. The key thing to remember is that this whole game may take some time to play out. To be sure, we are well into a nasty cycle here, for which there is no obvious circuit breaker ,but in baseball parlance I guess we are only at the bottom of the 4th.
Keep an eye on Susan Bies. As her retirement from the Fed approches on March 30th, I have detected a greater willingness to say what she thinks.
Calculated Risk and other high-quality blogs were both early and right on what is currently unfolding in non-prime and housing. You were and continue to be laps ahead of Wall Street. It is no wonder that you are seeing a pickup in hits from Federal Reserve portals, because they do not understand what is going on.
Thanks, Oz. I've still learned more from readers of this blog than I've taught, so there you is.
I hope I didn't sound dismissive of Syron by calling him "an old central banker." He calls himself "an old central banker." And, as I think I mentioned before, I bought FRE the day after Syron was made CEO.
Hence my point about the difference between being (or believing oneself to be) "fully hedged" versus hedged as well as it is possible to be. I don't really think Dick Syron either 1) believes that risk can be eliminated or 2) is letting FRE run naked on anything. I haven't gotten into the financials yet, of course, but part of me wonders if the hedge losses they're taking aren't possibly a matter of something being unwound that needed to be unwound sooner rather than later. I respect anyone who takes the first best loss instead of noodling around hoping for a miracle rally, until you're forced to take a bath. I reserve judgment until I've read more and fought my way through derivatives accounting, which I confess is not something I ever earned a Girl Scout Merit Badge in. Alas, as we've all come to conclude, this ain't the Girl Scouts.
Not at all. I, too, am a Syron fan. I'd much rather watch and listen to someone like Syron who, unlike so many fund managers and investors, has actually witnessed more than one economic and credit cycle.
J. Michael Neal, what is the ratio of price/rent today?
It's tough to say. Getting comps for a duplex arpund here is tricky, because the city hasn't allowed any new ones for quite a while; we're grandfathered in. The city assesses it at about $270k (just got the notice on Friday, in fact). The appraiser put it at around $250k when we refinanced last summer. Given that we bought at $105k, the ratio is probably now such that the payments would be roughly equal to a market based rent. Our tenants are long time friends, so they get off cheap.
Not much different. Not in Northeast.
It depends upon the part of Nordeast; we're two blocks from Central, just south of Broadway. Go about five blocks further south, and you hit the edge of the area that has become really trendy.
"Question two is, for everyone who wants to reduce credit risk by getting borrowers out of ARMs (where the borrower takes the rate risk"
This arguement is way too simplistic. There is "risk" for borrower in taking a fixed rate loan over an ARM. There are a lot of variables that go into that decision, but to flatly imply that risk is associated with only once choice is incorrect.
losses on derivatives - neither the article nor anyone in this thread has said whether these were fair value losses or GAAP losses. If they are GAAP losses then this is probably meaningless. GAAP often results in the derivatives being marked to market, while the securities portfolio they were hedging is kept at book. Thus perfect hedges generate wide swings in GAAP profits and losses. If they are fair value losses, then (and only then) would it show that they were not fully hedged.
The GSEs always do buybacks of delinquent loans. That's what the guaranty is all about. Always have. I'd guess the difference between this year and last year is taht last year they had buybacks, but mortgage insurance or other credit enhancements covered them all. This year either the losses exceeded the credit enhancements, or they had losses on loans of 80% LTV or less, that didn't have credit enhancements.
Clyde, I saw that interview, and it annoyed me quite a bit. At the moment I can't quite remember what obnoxious thing I said about it, but I remember being less than polite. It was not Syron's shining moment.
It's possible that Syron has never made a loan, traded a bond, or securitized a mortgage. I suspect he learns what he needs to know. I'll agree with you that there are people who don't.
That said, I really don't want FRE (or FNM) run like mortgage originators or broker/dealers. That's a business opinion and a political opinion, to which of course everyone else is free to say "Pfft!" I have always wanted the GSEs to be liquidity providers and credit commodifiers. I think that's what they do best. When they act like loan originators or bond traders, they make me nervous.
It depends upon the part of Nordeast; we're two blocks from Central, just south of Broadway.
I know the area well. I worked my way through the 'U' doing nights at what was then called 'EM' - its now a division of Dresser - at Hennepin & Central. Some friends of the family just sold a very nice older home in that area... they got mid $2XX,XXX too... approximately what it would rent for.
The point is that area while 'trendy' is not priced like say Edina Uptown or Crocus/Grand Ave or Highland Park. Those places sell at twice the buy/rent ratio that Nordeast runs. Even then I'd bet those areas would be cheap by 'coastal' metrics.
tanta - I don't know that they literally never make a whole loan sale, but all or nearly all of what they sell are guaranteed securities. And when a loan goes bad in a pool that they have guaranteed, they buy back the loan - it's how the guaranty is made good. So I don't see it being anything else. They aren't originators, so they aren't on the hook for buybacks the way an originator is. In fact, if there is an early payment default the chain would involve the GSE buying back from the investor, and then forcing the loan back to the originator.
Yes, mort_fin, I know that. I was just reading the paper and taking it at face value (why not? Everyone gets an off day). It says the loans were 120 days down. That implied to me that they were "repurchased" because they are defaults, not EPDs. In other words, I assumed it was a true recourse issue, not an EPD rep. And I thought I spent a lot of time last year reading about the GSEs being forced to reduce their portfolio holdings. I hadn't realized that those reductions all happened via securitization of the portfolio holdings; I had assumed that at least in some cases it involved outright sale.
So, a change of a billion/quarter.
Yes. And, apparently, because of losses on derivatives intended to hedge fixed interest rate risk, not on credit losses.
So question one is, what happens when the credit losses get worse? Will they be offset by hedge gains?
Question two is, for everyone who wants to reduce credit risk by getting borrowers out of ARMs (where the borrower takes the rate risk) and into FRMs (where the lender takes it): how, then, do you mitigate the rate risk you just traded for the credit risk?
WOW! Even Freddie is buying back bad loans and it is supposedly not exposed to subprime borrowers. Also, no explanation for derivatives losses. Can anyone here explain the losses?
WOW! Even Freddie is buying back bad loans and it is supposedly not exposed to subprime borrowers.
Do we know that from the article? It said 16% of their purchase portfolio were "non-traditional"
Freddie Mac has been an active buyer of some of the non-traditional mortgages that were part of a general loosening of lending terms in recent years. Loans that allow the borrower to pay only interest for a time, without reducing principal, accounted for 16 percent of the company's mortgage purchases in 2006, a total of $58.2 billion, the report said.
Depends on what non-traditional is & were they part of the buy back pool.
Tanta asked, "what happens when the credit losses get worse? Will they be offset by hedge gains?"
That's what is so puzzling. Their market position allows them to be fully hedged, no?
dryfly, I believe that the 16% referred to here are IO ARMs (and some small bit of IO FRMs). Those aren't necessarily A-minus or subprime credits.
hello form germany,
RJ has found this video from
Housing Bust Recovery in 1930s
Sorry. Page not found.
amazing!
Their market position allows them to be fully hedged, no?
I guess it depends on what you mean by "fully hedged." The older I get the more suspicious I am of that concept. They should be very well hedged. As well as anyone can be hedged.
How well can anyone be hedged right now?
PS: The current CEO of Freddie Mac is a former central banker.
Tanta also asked, "how, then, do you mitigate the [adjustable to fixed] rate risk you just traded for the credit risk?
Perhaps we are a the top of the rate increase cycle and getting borrowers into fixed rate loans is the hedge. Remember, Uncle Al recommended borrowers adopt ARMs at the bottom of the last cycle to hedge against another S&L like debacle.
You're hard to fool, Uncle Al.
So what happens when borrowers can't afford to fix the rate at the top of the cycle? The "anti-S&L debacle"?
Simple, demand drops and interest rates decline. Folks keep on renting.
But housing demands drops and prices.
Nice seqencing with previous post. So, tell me again, why do the GSE's need to become more adventurous?
The thing of note in this is the one billion dollar swing. From plus 684 million to minus 480. Will there be a billion dollar loss next time?
Does an inverted yield curve eventually create losses for financial institutions? Is there a way the banks have been hedging this risk or is it just a matter of time before the losses show up?
"The yield curve is particularly important to financial institutions because banks and securities firm borrow money at short-term rates and lend at long-term rates. A flat yield curve, therefore, squeezes margins. An inverted one hurts a bank's profits."
Tanta followed with, "[s]o what happens when borrowers can't afford to fix the rate at the top of the cycle?"
In addition to regular refinancng fees, charge more fees -- workout fees, loan conversion fees, insurance fees, copying and faxing fees, my dog ate the paperwork fee.
That 1930's clip was quite interesting. The construction sites showed more workers on site than you see today. There's a lot of pre-fab framing and roofing on modern homes.
The couple touring the model home got to look all around without a Realtor following them! Heh. Although I'm sure even in the 1930s there were salespeople.
Anyway, hang on to the last bit... the sign outside said payments of $27 a month. Woo-hoo! 1930's houses for everyone.
The big difference in that old propaganda video compared to today was when the announcer said "now they can buy the house for less they spend in rent". Where can you do that today?
Check out today's heading today's headline in Charlotte Observer. Apparently, after the second printing of 4 day series on rising foreclosures, HUD and FHA are going to review Beazer Homes.
Just MAYBE there is a conflict of interest, when the builder acts as its own broker? Was this an ISOLATED incident, ONLY in Mecklenburg and Cabarrus counties?
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(You may need BugMeNot)
In addition to regular refinancng fees, charge more fees -- workout fees, loan conversion fees, insurance fees, copying and faxing fees, my dog ate the paperwork fee.
But Uncle Al, it only takes me 12 seconds to decide to lose money on a loan. Don't I have to pass this cost savings onto the borrower?
"now they can buy the house for less they spend in rent". Where can you do that today?
Would you believe that was the main reason why people used to buy houses? Tying up a down payment in return for improved monthly cashflow? What a concept.
"Families are finding it hard to stay in their homes as deteriorating house prices, regional job losses and increasing mortgage payments are making their homes less affordable," chairman and chief executive Richard F. Syron said in a prepared statement.
Excuse me? Why would dropping house prices make a house you have already bought less "affordable"? Unless you couldn't really afford it in the first place, and were counting on rising prices to bail you out upon sale or refinancing.
Anthony Fleming
"now they can buy the house for less they spend in rent". Where can you do that today?
Just move from CA to Podunk.
Just move from CA to Podunk.
And don't forget to bring your own agricultural implements.
The big difference in that old propaganda video compared to today was when the announcer said "now they can buy the house for less they spend in rent". Where can you do that today?
Northeast Minneapolis. At least, we could when we bought this house eight years ago. 30-year fixed mortgage payment of $904, including taxes and insurance, for a 2400 sq ft duplex. We rent out the bottom half for $700 a month, which is underpriced because we get the tenants to do the yardwork.
That implies rental costs of $1400 for the whole place, or $500 more than the mortgage payment.
Vader, the losses were ~5 billion in 2003. Freddie is getting better with time. Very much like wine!
J. Michael Neal, what is the ratio of price/rent today?
Out west the cap rate is soooo low, it is not worth looking at property until the price goes down 40-60%. Until then, renting is one of the best arbitrage opportunities around.
Yes, a $1B decline/quarter does sound like an expensive trend for anybody. Compare and contrast Fannie whose position is unstatable (might as well cut to the chase and fess up that some of us believed them when they said their statements would be postponed) but whose 30% reserve requirements may have saved them from taking on some of this "unproductive" volume.
Is FRM/totalM the major brake on rising FF rates --not those consumption views (CPI) of inflation?
Are the banks heavily hedged against that possibility (interest rate swaps) hoping there are counter parties taking the other side that lower interest rates will be necessary to spur consumption? [And hence the risks are spread and the derivative instrument, interest rate swap, is said to "disintermediate" the risk.]
Good thing there is a difference of opinion on future interest rates and the parties aren't unanimously on one side of this issue, no?
Payments less than rent is what I would expect to be possible in a normal market, with a 25% down.
My own house with 20% down was roughly equivalent to rent in Charlotte. I expect it to tip in my favor by next year, due to the advantage of fixed rate financing.
I have one rental at 135 GRM. I could probably raise the rent a little, but I like the fact that tenants don't move too often, when they're getting a decent rate. My last ones stayed a year and a half.
Broker,
Are you sure Freddie's numbers are correct? What about Fannie's? Why aren't they current with their financial filings? What are they hiding? Why aren't SEC or exchanges suspend their listing b/c of their accounting misdeeds? B/C they are too big to fail! Bunch of cheaters, schemers, conspirators! Examples of free market enterprise!
How well can anyone be hedged right now?
Exactly. Whose hedging the hedgers?
anon, Fannie and Freddie are GSEs. It starts with "G". That might tell you something.
The big difference in that old propaganda video compared to today was when the announcer said "now they can buy the house for less they spend in rent". Where can you do that today?
About 80% of the surface area of America fits that description - they just don't happen to be on either coast or a fast growing interior city.
I mean how important is it to own a home? If it is really important & they can't afford it where they are... then move. Otherwise rent. Renting isn't the end of the world.
And don't forget to bring your own agricultural implements.
Ummm. There's no shortage of implements out here. Think coal to Newcastle. Snow cones to eskimos.
Free enterprise and market efficiency are only textbook theories! What we are witnessing are market manipulations and deficiencies created by these cheaters with full blessings and encouragement from the very people who are supposed to provide oversight to all these illicit activities. We now have witnessed two back-to-back bubbles and the continued supportive arguments for these bubble facilitators are just incredible!
J. Michael Neal, what is the ratio of price/rent today?
Not much different. Not in Northeast. Minnehaha creek part of Minneapolis maybe... or Crocus Hill & Highland Park in St. Paul. But for most of older urban Twin Cities... you can buy for about what you can rent. There are lots of 3 br homes in the $150K-$200K area... run a 30 FRM on those and you can easily beat the same house as a rental.
Again we aren't talking the hottest up trend neighborhoods... but not ghettos either.
Go outstate like where I live and its even cheaper. You can buy homes in my sleepy little river town for $100K.
Long-time reader, first post. CR and Tanta, thanks for all the fine help over the past nine months. No quarrel with your observaton that Freddie CEO Richard Syron is a former central banker, but one quibble. Here's the relevant section of his bio:
"Prior to joining the Amex as chief executive officer, Syron held senior posts in the banking sector including top positions at the Federal Reserve Bank of Boston and at the Federal Home Loan Bank of Boston. During his time at the Federal Reserve from 1989 through 1994, Syron helped shape monetary policy as a member of the Federal Reserve Board's monetary policy making Federal Open Market Committee. Syron also was sponsor of a landmark study on racial discrimination in mortgage lending during this time, and was the key figure in the restructuring of New England's banking system following the strains from the 1980s and early 1990s".
On February 28th, discussing Freddie's new, tighter lending standards (end to purchases of no doc and stated income from September 1st), Syron said "the last thing you want to do to that [sub prime] market is take out a major purchasers overnight. I saw the New England credit crucnh as president of the Boston Fed. Everyone turned off the spigot all at once, and it's a very, very unhappy result".
In other words, Syron has lived through the eye of one hurricane, and thus has experience of what lies directly ahead. Whether the spigot is turned off all at once, or merely slowly, the end result is actually the same.
The bogeyman that people (ex this an other Blogs which have nailed the non-prime bust, both in its extent thus far, and most importantly timing) - seem to have forgotten is housing inventory. I read somewhere recently that non-traditional loans were behind as much as 70% of housing demand in California over the past two years.
That may be right, but it does sound a little high (happy to be corrected on this). Let's assume that the real number is 50%, or even 40%. Over the past two years housing inventory in parts of California has doubled, even tripled, and continues to rise. What happens if 100% of that 40% are unable to refinance, either outright or on the same terms? How on earth do you shift all those houses? Increased inventory means prices will decline, this crimps consumer balance sheets, which crimps consumer spending, which crimps the economy, which makes house prices go down. It is not easy to see a circuit breaker for this one, nor a happy ending. The trick is realising all this may take some time to play out.
The housing market peaked in July 2005, right when Robert Toll started flogging shares in the company he created. It took a year for the stock market to get it, but then crude dropped $20 and everybody decided the world was a happy place: housing didn't matter. Ironically, right at that moment, the first problems bubbled to the surface in non-prime, and in early September, one investor put on a sizeable short position i
I'll tell you what I'm really sick of is hearing people explain that in the main stream press that "deteriorating home prices" is one of the factors "making their homes less affordable". Argh! Declining prices don't make your home less affordable unless you are playing musical chairs with lenders AND it was already unaffordable to begin with.
Whoops.
..put on a sizeable a short position on in the ABX.HE.06-02 BBB-. The hint that something was really awry was when spreads on the single A pieces of the ABX.HE.06-02 started widening sharply in the middle of January. The key thing to remember is that this whole game may take some time to play out. To be sure, we are well into a nasty cycle here, for which there is no obvious circuit breaker ,but in baseball parlance I guess we are only at the bottom of the 4th.
Keep an eye on Susan Bies. As her retirement from the Fed approches on March 30th, I have detected a greater willingness to say what she thinks.
Calculated Risk and other high-quality blogs were both early and right on what is currently unfolding in non-prime and housing. You were and continue to be laps ahead of Wall Street. It is no wonder that you are seeing a pickup in hits from Federal Reserve portals, because they do not understand what is going on.
Keep up the good work.
Thanks, Oz. I've still learned more from readers of this blog than I've taught, so there you is.
I hope I didn't sound dismissive of Syron by calling him "an old central banker." He calls himself "an old central banker." And, as I think I mentioned before, I bought FRE the day after Syron was made CEO.
Hence my point about the difference between being (or believing oneself to be) "fully hedged" versus hedged as well as it is possible to be. I don't really think Dick Syron either 1) believes that risk can be eliminated or 2) is letting FRE run naked on anything. I haven't gotten into the financials yet, of course, but part of me wonders if the hedge losses they're taking aren't possibly a matter of something being unwound that needed to be unwound sooner rather than later. I respect anyone who takes the first best loss instead of noodling around hoping for a miracle rally, until you're forced to take a bath. I reserve judgment until I've read more and fought my way through derivatives accounting, which I confess is not something I ever earned a Girl Scout Merit Badge in. Alas, as we've all come to conclude, this ain't the Girl Scouts.
Tanta,
Not at all. I, too, am a Syron fan. I'd much rather watch and listen to someone like Syron who, unlike so many fund managers and investors, has actually witnessed more than one economic and credit cycle.
I look forward to your next post.
Oz
J. Michael Neal, what is the ratio of price/rent today?
It's tough to say. Getting comps for a duplex arpund here is tricky, because the city hasn't allowed any new ones for quite a while; we're grandfathered in. The city assesses it at about $270k (just got the notice on Friday, in fact). The appraiser put it at around $250k when we refinanced last summer. Given that we bought at $105k, the ratio is probably now such that the payments would be roughly equal to a market based rent. Our tenants are long time friends, so they get off cheap.
Not much different. Not in Northeast.
It depends upon the part of Nordeast; we're two blocks from Central, just south of Broadway. Go about five blocks further south, and you hit the edge of the area that has become really trendy.
"Question two is, for everyone who wants to reduce credit risk by getting borrowers out of ARMs (where the borrower takes the rate risk"
This arguement is way too simplistic. There is "risk" for borrower in taking a fixed rate loan over an ARM. There are a lot of variables that go into that decision, but to flatly imply that risk is associated with only once choice is incorrect.
losses on derivatives - neither the article nor anyone in this thread has said whether these were fair value losses or GAAP losses. If they are GAAP losses then this is probably meaningless. GAAP often results in the derivatives being marked to market, while the securities portfolio they were hedging is kept at book. Thus perfect hedges generate wide swings in GAAP profits and losses. If they are fair value losses, then (and only then) would it show that they were not fully hedged.
The GSEs always do buybacks of delinquent loans. That's what the guaranty is all about. Always have. I'd guess the difference between this year and last year is taht last year they had buybacks, but mortgage insurance or other credit enhancements covered them all. This year either the losses exceeded the credit enhancements, or they had losses on loans of 80% LTV or less, that didn't have credit enhancements.
Tanta,
Love the discourse, but have to disagree with you on Syron. He has never made a loan, traded a bond or securitized a mortgage in his life.
Go back and watch the CNBC interview the day Freddie announced their September restrictions on ARMs.
CNBC: Freddie Mac Raises Standards For Buying Subprime Mortgages - CNBC
Watch the interview and then let's talk. As somebody said on another blog, "Where is the adult supervision?". Incredible.
mort_fin, are you sure that "repurchases" here mean net guarantees? I had assumed it was recourse on portfolio sales.
Clyde, I saw that interview, and it annoyed me quite a bit. At the moment I can't quite remember what obnoxious thing I said about it, but I remember being less than polite. It was not Syron's shining moment.
It's possible that Syron has never made a loan, traded a bond, or securitized a mortgage. I suspect he learns what he needs to know. I'll agree with you that there are people who don't.
That said, I really don't want FRE (or FNM) run like mortgage originators or broker/dealers. That's a business opinion and a political opinion, to which of course everyone else is free to say "Pfft!" I have always wanted the GSEs to be liquidity providers and credit commodifiers. I think that's what they do best. When they act like loan originators or bond traders, they make me nervous.
It depends upon the part of Nordeast; we're two blocks from Central, just south of Broadway.
I know the area well. I worked my way through the 'U' doing nights at what was then called 'EM' - its now a division of Dresser - at Hennepin & Central. Some friends of the family just sold a very nice older home in that area... they got mid $2XX,XXX too... approximately what it would rent for.
The point is that area while 'trendy' is not priced like say Edina Uptown or Crocus/Grand Ave or Highland Park. Those places sell at twice the buy/rent ratio that Nordeast runs. Even then I'd bet those areas would be cheap by 'coastal' metrics.
tanta - I don't know that they literally never make a whole loan sale, but all or nearly all of what they sell are guaranteed securities. And when a loan goes bad in a pool that they have guaranteed, they buy back the loan - it's how the guaranty is made good. So I don't see it being anything else. They aren't originators, so they aren't on the hook for buybacks the way an originator is. In fact, if there is an early payment default the chain would involve the GSE buying back from the investor, and then forcing the loan back to the originator.
Yes, mort_fin, I know that. I was just reading the paper and taking it at face value (why not? Everyone gets an off day). It says the loans were 120 days down. That implied to me that they were "repurchased" because they are defaults, not EPDs. In other words, I assumed it was a true recourse issue, not an EPD rep. And I thought I spent a lot of time last year reading about the GSEs being forced to reduce their portfolio holdings. I hadn't realized that those reductions all happened via securitization of the portfolio holdings; I had assumed that at least in some cases it involved outright sale.