Bernanke: The Subprime Mortgage Market
Submitted by
CalculatedRisk on Thu, 05/17/2007 - 6:50am (50 comments)
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WTFont, is he high?
For the record, no I am not high. I am actually kind of short.
Hey, don't blame me, I only read the shit they put in front of me.
imagine benny saying:
man this subprime will take the economy down..alt-a/prime meltdown is coming..
imagine hanky saying: economy is going to tank pretty soon..dollar is history..
of course, there pronuncements is for public not to panic.
( also,i think dollar has reach its bottom)
Initial jobless claims for the week came in much better than expected at 293K. The 4-wk moving average, 306K, now matches the low for 2007. Continuing claims are also below the April average. These both point towards an improvement in non farm payrolls in May.
CR quoted the first paragraph. Here's how the rest of it goes:
17-22. The best solution is to disclose to the borrower that these loans rarely make sense. It would be bad to ban them entirely, because they often do make sense.
23-24. We are also guiding the underwriting of the banks that aren't the ones making these loans.
25-26. None of this will affect the home market unduly, because jobs and wages will go up.
27-28. The market will correct any problem we can't mop up with disclosure requirements.
"We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,"
How do you refute this? Of course it will be limited...does anyone think it will be "unlimited"?.
Also, define significant.
We have already seen spillover. Some would see it as significant already.
If we get into a recession....is that "significant".
Tanta,
I love you!
[misfiled and thus reposted from the previous thread]
It isn't the rocks you can see that a good captain worries about. Bernanke's error is in assuming that those "still performing well" mortgages will behave as they had in the past. That behavior was predicated on borrowers having skin in the game." This time IS different. These people with 0% down are not going to tough it out for a few years to get back to zero unlike people in 1990 who toughed it out to get back their 20%. It gonna get fugly. The real wake up call is going to be when the lending community sees all the keys in their mailbox and complains 'We had a deal." Maybe in the past, you know when employers hired people for decades not quarters and the like that sense of obligation held some meaning. This time the borrowers are going to finally do the math and mail in the keys.
Tanta - You are hereby dubbed official newspeak official. I'd take your commentaries on the news over CNN's anyday.
Funny as I am finding the comments (thanks!), I would like to point out that Bernanke does understand the problem:
"In particular, technological advances facilitated credit scoring by making it easier for lenders to collect and disseminate information on the creditworthiness of prospective borrowers. In addition, lenders developed new techniques for using this information to determine underwriting standards, set interest rates, and manage their risks. ... regulatory changes and other developments have permitted lenders to more easily sell mortgages to financial intermediaries, who in turn pool mortgages and sell the cash flows as structured securities. ... These factors laid the groundwork for an expansion of higher-risk mortgage lending over the past fifteen years or so."
In other words, FICO dependent lending is the new strategy - why bother to go through all the fuss and expense of verifying income, assets and ability to repay, especially when someone else is willing to take the risk off your hands?
Except that oops, it appears a minor technical difficulty has breached the bulkhead of this titanic credit innovation....
I read this as a Fedspeak threat that if the industry doesn't regulate itself, the Fed will step in and use its authority under HOEPA (believing that it now has legislative support) to impose further regulations on all players:
"although the supply of credit to this market has been reduced--and probably appropriately so--credit has by no means evaporated. For example, even as purchases of securitized subprime mortgages for collateralized debt obligations--an important source of demand--have declined, increased purchases by investment banks, hedge funds, and other private pools of capital are beginning to fill the void. Some subprime originators have gone out of business as their lenders have cancelled credit lines, but others have been purchased by large financial institutions and remain in operation."
In other words, we're awake and we're watching.
Steve, Much better? The forecast number was 310K. I don't know what the statistical margin of error for this report is (couldn't find it) but I doubt it's a stretch to imagine the as-reported number couldn't be revised to the forecast.
What is probably going on is the service and construction people either don't qualify for unemployment insurance benefits or they are underemployed. Think of the realtor that is making 50% less sales. Also, I doubt illegals are filing claims in this immigration reform and terrorist crackdown climate...
This time the borrowers are going to finally do the math and mail in the keys.
Robert Coté
It is different this time!
Average Joe said: "...Also, define significant..."
Okay.
For starters, yield-curve inversion, steadily falling earnings, steadily rising unemployment rate, steadily rising inflation above 4.25%, negative year-over-year growth in durable goods orders, contraction in manufacturing, falling productivity.
If housing is genuinely having a significant negative impact on the economy it MUST show up in the economy and it won't happen overnight, it will develop over time.
What is occurring is a minor impact on the economy, with growth slowing to a still-positive level.
Sebastia
Tanta, I value above all things people who make me laugh. Even if you stole it the following made me laugh:
16. We're snorting a fine line here.
My question: did he talk about the dollar?
The dollar is basically in free fall against the euro.
The dollar is even against the yen and the yuan, because...
Well, Sebastian, please explain these currency movements to us.
You see, there is an alternate reality. It's called the euro. Or the pound. And that alternate reality says the U.S. sucks and is going to continue to suck.
"It was our plan all along to lure you in with historically low interest rates, then ratchet them up 17 meetings in a row until you learned your lesson....heh heh heh" Be
Put another way: do you put your money in the U.S. stock market, or do you put it in a European or London market?
I also want to directly thank Calculated Risk for a marvelous blog.
Absolutely marvelous. I love it.
Addicted
Philly Fed Survey also showed some improvement this month. That's two regional reports this month that suggests manufacturing is looking better of late.
"Activity in the regions manufacturing sector improved slightly in May, according to respondents to this months Business Outlook Survey. Indicators for general activity, new orders, shipments, and employment all improved from their readings in April. Firms continued to report higher input costs, but only slightly more firms reported higher prices for their own manufactured goods than reported price decreases. The regions manufacturing executives were also more optimistic about future activity, with most future indicators increasing for the second consecutive month."
arbogast said: "...Well, Sebastian, please explain these currency movements to us.
You see, there is an alternate reality. It's called the euro. Or the pound. And that alternate reality says the U.S. sucks and is going to continue to suck."
If the impact is as bad as you say, it will have to show up as poor readings in the economic indicators.
If it doesn't, either the negative impact isn't as important as you think or it's being overwhelmed by more-positive factors.
Sebastia
Steve:
I don't think manufacturing activity counts as a positive until it becomes clear they can sell what they make. If they can't sell what they make then it's channel-stuffing and it's a net negative.
Fortunately in this case we can be confident that Sebastian is going to step in and buy up any excess inventory.
albrt said: "...Fortunately in this case we can be confident that Sebastian is going to step in and buy up any excess inventory..."
Philadelphians are going to have to step-up, I've already got my hands full supporting my own region.
S.
Long story short and OT: for the moment
I am an Inspector for a small town here in Mass, I just went out before lunch to do an inspection for a new home Priced last year at this time $930,000
It just sold for $720,000..I would say that is a major haircut, and a major loss for the builder.
Robert Cote wrote: This time the borrowers are going to finally do the math and mail in the keys.
I totally agree. And it won't be in just the crappy neighborhoods- I really think "WhiteLandia" is just going to pack it in and move back in with their parents- Unless CW has already done a reverse mortgage on it!
Steve, Much better? The forecast number was 310K. I don't know what the statistical margin of error for this report is (couldn't find it) but I doubt it's a stretch to imagine the as-reported number couldn't be revised to the forecast.
Well, I'll stand by Steve on this one. There's no weakness in this jobless claims data. The past few jobless claims report could be an aberration (jobless claims do that a lot), but if not they suggest a strong rebound in payrolls.
If this is real it could be related to an upsurge in hiring in the business finance sector.
COMMODITIES ARE BUBBLES
Commodities trade on supply and demand. Almost all commodity spot,especially food, prices are up substantially over last year's price per WSJ tables. This isn't a bubble, this toil and trouble- fewer resources for more people. Time to plant some potatoes, get a horse and buy a gun is nearing, and I'm an optimist.
Put another way: do you put your money in the U.S. stock market, or do you put it in a European or London market? Well, in 2006 my retirement money invested in an S&P index fund earned 15.79% and the money invested in an international index fund earned 26.32%. Of course since "past performance etc..." I've since conducted a major rebalancing of my account.
I think a pattern is emerging here. A year ago, the party line from the fed was "there is no housing bubble." Then six months ago, it was "yes there was a bubble, but we've bottomed". When sub-prime when kaput-sky in Feb, it became "Housing bust contained, no effect on overall economy." Now they seem to be moving to a new position, namely that housing is going to "restrain" the general economy but not send it into recession.
It's nuanced as usual, but they are growing increasingly bearish in tone. I'm guessing we're in rate-cut land by August.
At the end of the day, so much of this comes down to the simple concept of responsibility.
We've simply advanced enough that for too many people, no matter who they are, no matter what they do, they have the ability to convince themselves that whatever they did was OK, in fact, it was the right thing to do at the time.
That goes for Bernanke, lenders, borrowers, brokers, rating agencies, anyone and everyone. At least if you want to live that way, and, sadly, all too many people do.
If everything Bernanke said today turns out to be 100% wrong, what will be the consequences to him? A return trip to Princeton?
I don't think he'll have even an iota of regret about the things he has done and said, even if he doesn't believe it himself,because he will convince himself that he had no choice. And, if by some miracle everything works out, he can be deified like his sleazy and unscrupulous predecessor, at least in the short term.
As already stated though, he is not alone. There's simply too much long term value in acting irresponsibly for too many people.
If they have to deal with a mess, they'll deal with it later, and if they're lucky, they won't have to deal with it, someone else will.
Yeah, jobless claims were good. But the Conference Board leading index fell by 0.5 percent:
"The leading index is 0.7 percent below its April 2006 level. In the second half of 2006, the leading index was essentially flat from July through November, followed by a small pick up in December, and it is now slightly below its October level. At the same time, real GDP grew only at a 1.3 percent annual rate (advance estimates) in the first quarter of 2007, following a 2.5 percent rate in the fourth quarter of 2006. The recent behavior of the composite indexes suggests that economic growth is likely to continue to be slow in the near term.
BTW xtopher,
Should the fed be dumb enough to cut rates, the dollar goes through the floor.
I'm guessing we're in rate-cut land by August
And many many Foreclosed properties, prior to that.
I agree it has to be August, Sept & November are Hugh reset months for all these Sub-Prime Mortgages...If they think the Retail Environment is bad now...wait till the non-Christmas season shopping kicks in...Crickets will be heard in the Isles
Profits are good, capital is basically free and not surprisingly businesses are at least cautiously optimistic. The problem is the consumer is 71% of the economy, and with stagnant real wages, full employment, a negative savings rate and the housing atm out of business I don't know where the consumer is going to get the cash to generate a rebound in economic growth. I'm still not convinced a real recession is a sure thing, but if you stay at 1% for long enough, it will start to feel like one regardless.
Tanta for President!!
You really are great Tanta. Thanks for the laughs.
Sometimes you have to laugh in the face of reality!
Dang, the Brits raised rates- and are going to have to go back to the well again to calm inflation and Ben spews this crap?
When metals finish their little swan dive buy more, more, more. Best investment for the small guy- go and get some nickels from the bank. I actually got some static from my credit union on coins yesterday after I asked for a lousy $20 worth. Now, what does that mean?
shortages of coins are starting behind the scenes...you do the math.
To the Carly Simon tune:
Stagflation is makin' me wait,
It used to be for while that Greenspan's river of money flow for a while, but now the river doesn't seem to flow here anymore!!!
But I haven't got time for the pain,
I haven't got time for the subprime pain....
Sebastian,
To be honest, I agree with you.
And I'm not doing my traditional tongue-in-cheek act.
Things have to get bad in the U.S. before things are bad in the U.S. It isn't good enough to say that our currency has been devalued until people feel pain in the U.S.
And I don't think people are feeling pain in the U.S. Look at the response to major increases in gas prices: yawns all around.
Or so it seems.
And look at the stock market. Why, you get a feel-good feeling even if you aren't snorting a fine line.
Selected company profits are gang busters.
It's like the war in Iraq. We read about death, but we don't feel death. At least most of us don't. And in the case of the war in Iraq, which something like 60% of the people want to get out of, do you see protesters in the street? Nope.
So, things are fine.
My worst bear case is the following. I think that the slopes in the recent data graphed by CR are unprecedented. I also think there is research that indicates that when the balloon goes up, things are going to get really bad really, really fast.
If that's going to happen, it's going to happen in the next 6 months.
Otherwise, slow bleed.
But I agree. Talking to people in the U.S. about the value of the euro makes about as much sense as talking to them about the price of a BMW. They're selling like hotcakes.
"You see, there is an alternate reality. It's called the euro. Or the pound"
England and Europe have their own housing and credit bubbles. Be careful.
arbogast said: "...Why, you get a feel-good feeling even if you aren't snorting a fine line...."
I saw that, too, and think it was just about the wittiest phrase Tanta ever wrote, which is saying something.
S.
I've already got my hands full supporting my own region.
S.
Sebastian
Braggart.
Seventy-five percent of those foreclosures are the result of refinancing, said Kathi Williams, director of the Colorado Division of Housing in Denver.
The Greeley Tribune. Colorado came in at No. 2 in the nation for foreclosure rates, recording 16,435 foreclosures from January through March. That represents a 6 percent jump from the same time last year.
Interesting what a large percentage of the foreclosures are not first time buyers but instead refi's. The refi's may be the group to keep an eye on when you consider the very large increase in overall mortgage debt created the past 5 years, its hard to imagine that a 5% increase in homeownership rates (65 to 69%) could account for the additional 4.7T of new mortgage debt.
One thing that's missing from this discussion:
Bernanke CANNOT appear overly worried about the subprime mess or housing. Fed chairman never panic and they don't talk about really bad things happening, except in very abstract terms.
Fed chairman must have a good bedside manner and they often sugarcoat the truth a bit, because financial markets tend to freak out when Fed officials talk about bad things happening.
I'm sure Bernanke isn't as bearish as 99% of the people who comment here, but he doesn't have his head in the sand either (or in any other dark damp place).
Here's what Alan Greenspan told his FOMC colleagues about policy communications in January 2001 as they were cutting interest rates by 50 basis points in an emergency session: "It was boring, it was dull, it was repetitive, it was nonintellectual, and it worked like a
charm. So I would suggest to you that your inclinations to be thoughtful, conceptual, and
interesting be suppressed."
Always remember those words when you read Fed statements.
Don't know, arbogast.
If a person has pancreatic cancer but the rest of the body is healthy, they're still usually going to die. I still say the rest of the economic body isn't that healthy, either, it just acts that way due to healthy doses of adrenaline.
The other issue I have with Sebastian, Steve, and even (to a lesser extent) CR is the over-reliance on models and statistics. Economists uses models and statistics, and they're famous for consistently missing recessions.
Just because it's taking a long time to get there doesn't mean it's not happening. The fact that it is taking a long time has been especially helpful for me, since it continues to give me more time to prepare. I've been on bubble economy watch since 2003, and everything that has happened since was expected. Of course, the timing has not been, else I'd be richer than Croesus by now.
AlienM,
"Best investment for the small guy- go and get some nickels from the bank."
I tried that a while back. My bank sold me as much as I could carry out of the joint. Smelted some down in my garage (yeah,I know it's illegal) and found out you can't separate the nickel and copper without very expensive equipment.
What you wind up with is cupro-nickel. I couldn't find a market here in the US. So I loaded up the truck and headed to Nogales, Mexico with a half ton of the stuff. (yeah, I know it's illegal) Guess what, no market down there either.
Now I guess I'll have to manufacture shiny widgets to get my money back. And to think my wife told me that nickel investment didn't have an exit strategy.
Beautiful.
"Economists uses models and statistics, and they're famous for consistently missing recessions."
Yes, but to CR's credit, that graph shows pretty plainly that employment is a lagging indicator, and that every time there was a recession, employment only takes a dive once the recession has been going on for some time. Therefore, it isn't out of the question to hypothesize that we are in a recession right now even though the employment numbers won't show it for quite some time.
Why do people assume that the Fed Chairman and staff have anything unique or useful to say about the mortgage market? Please provide an example or two to convince me. The people in the market have a lot of interesting insights; the Fed's knowledge of the market is second hand and obscured in translation by economic theory.
Always remember those words when you read Fed statements.
rex
Good point, I hadn't seen that before. Thanks, rex.
In his next speech Bernanke will tell us about:
29-35: Umm..We're in a global economy...and uh, yeah, anyone that wants a mortgage can get one through the Nigerian Mortgage Bank, just by sending them $10,000 cash up front.
Heh.
Bernanke can't easily say there is a crisis to fix while not cutting rates. And he doesn't seem to be in the position to cut, even if everyone wants it.
Seems to me the bigger message is really:
We are not cutting rates!!!! (get over it)
when did the Fed ever predict a recession? never. did the experts predict the crash of '29 or deflation that precipitated the depression? nope.
as far as rates go, the Fed follows the market, it doesn't lead it. like durocher said, "it's a fact you can look it up."
you don't suppose they're up to the task now?
t j & the bear said: "The other issue I have with Sebastian, Steve, and even (to a lesser extent) CR is the over-reliance on models and statistics. Economists uses models and statistics, and they're famous for consistently missing recessions..."
Which economists? If you're talking about the ones in policy-making positions (like Fed members) I might agree. If you're talking about the ones at the brokerage houses or investment banks with conflict of interest issues, I might agree. If you're talking about mutual fund managers, newsletter writers or other assorted gurus all with their own agendas, I might agree.
However, I think the problem is in the decision-making (which can be flawed by bias, hidden agendas, and political pressure to "do something") and not the data.
Sebastia