Shopping at Amazon?
Wait! If you click on the Amazon banner link at the top of the page first, HCN will get a percentage of anything you purchase for 24 hours!
Open predictions
Our local book authors
User login
Who's online
There are currently 3 members and 137 guests online.
On the worst of the worst that the GSEs take, what are the total fees they collect now (upfront and per year)? Ditto for the best of the best? Just to get a sense if they are collecting enough for the risk they are taking.
liquidity shower underway
Fed, top central banks to flood markets with cash - MarketWatch
liquidity shower underway
The irony is that this Fed plan may be intended as an alternative to interest rate cuts to stop the flow of credit into stocks and commodites.
If that's the case, it's backfiring so far.
It almost seems as if you detest the 'prudent.'
ac,
Can a hedge fund through an IB go pledge whatever collateral and use the gained liquidity to place bets on say oil futures?
Can someone explain again what a cram down is (or post the link to where it was discussed?) Thanks!
In Canada since the early 80s our law has required 5% down and mortgage insurance of 2.5% for mortgages under 25% down, so to buy a home with 5% down, you really need 7.5%. I believe the insurance rate declines as you get closer to the 25% down, but I forget all the detail of it.
It is a mistake to allow the payment to be in the form of a higher interest rate.
Re Cram down, oops the link is right there, thanks anyway.
ac,
Can a hedge fund through an IB go pledge whatever collateral and use the gained liquidity to place bets on say oil futures?
I honestly don't know, but I suspect if there's any way possible they'll ultimately find it.
In a battle of wits between the hedgies and the central bankers, my money goes on the hedgies any day.
On the worst of the worst that the GSEs take, what are the total fees they collect now (upfront and per year)?
That is a difficult question to answer because:
You really have to go to the GSEs' financials to look at aggregate numbers for g-fees (and "postsettlement" fees) collected or earned.
The way the biz has worked in the last 5-10 years, the 800 pound gorillas got very low g-fees, and the smaller players got higer g-fees. That meant the 800 pound gorillas got bigger and bigger, as they could compete aggressively in rate with little community banks.
Eventually we got to some serious counterparty risk: it's not necessarily that the GSEs aren't taking a high enough g-fee (although quite possibly they haven't heretofore); it's that the g-fee structure created huge concentrations for them. Now they're living with having four or five big counterparties who are themselves at serious risk.
I would guess that the typical g-fee for prime, standard, no-brainer 30-year fixed rates in the 200-2007 period averaged 12.5-25 bps. It depended on who the seller/servicer was. I have seen g-fees for the "alt" or "near prime" or "expanded approval" stuff in the 135 bps range.
Fannie can charge what they want because they're quickly becoming the only game in town. Don't like their fees? Then take your business to . . . uhh . . . yeah, looks like you'll be paying those fees.
Unfortunate for new homebuyers, who in many ways are having to atone for the sins of the Serin Generation. But new homebuyers with solid credit and a downpayment and with a reliable appraisal shouldn't be adversely affected.
Why should the rest of us pay higher fees and rates for the sins of these fools and the others who should have never been buying homes?
When this is all said and done, we will ALL pay for this fiasco. So yes, we are all subprime now.
"Our fourth-quarter results are not expected to be better than they were in the third quarter," said Freddie Mac CEO Richard Syron, speaking at a conference sponsored by Goldman Sachs.
Less than a month ago, the government-sponsored enterprise reported a net loss of $2 billion in the third quarter. Future credit losses are expected to reach between $10 billion and $12 billion, Syron said.
Could someone please explain to me how the GSEs are in so much trouble? I always thought they'd be fine because they only buy "conforming" loans, and lower risk products. Is it the case that the lower risk products are falling apart more than expected, or is it the case that they bought more higher risk loans than previously thought? Or something else?
Can a hedge fund through an IB go pledge whatever collateral and use the gained liquidity to place bets on say oil futures?
I don't think so. According to the FRB press release, the Term Auction Facility will only be available to depository institutions; i.e., the same institutions who are eligible to borrow from the discount window. IBs are not depository institutions.
This facility looks almost identical to the discount window, except instead of banks coming to the Fed, the Fed forcibly injects the funds in an auction. The funds will go into the system, "stigma" or no.
This is what is meant by 'higher cost of borrowing'. It's still supply and demand. The banks have a lot less to work with and so get to ration it out to only those who can afford it.
Alternatively, their risk is now higher (declining values, etc) so the higher the risk, the higher the price.
This is how the grown ups play. Can't afford it? Don't buy it.
Go stand in the corner until you stop whining!
Matthew: I think the problem is that falling home prices have resulted in greater losses for the lender in the event of foreclosure, and may be increasing the rate of delinquency and foreclosure itself, although that point has been disputed here as elsewhere. The GSEs may be suffering despite having better lending standards than their private industry counterparts.
They may not have loosened their lending standards to the extent that the other mortgage lenders did, but when the value of the underlying collateral drops as it is dropping now, everyone who has a lien against that collateral suffers.
They said no tax payer bailout. So i guess a fed bailout is ok.
This facility looks almost identical to the discount window, except instead of banks coming to the Fed, the Fed forcibly injects the funds in an auction. The funds will go into the system, "stigma" or no.
While this may be a good thing, I think fundamentally the problem that the Fed faces is that we have these economies that are configured specifically to create bubbles, and anything that the Fed does to support the economy is going to support bubbles.
It's like if you pour gas into a bulldozer it's going to go bulldoze things, even if it's specially formulated gas.
We need some deeper economic reconfiguration, which will necessarily be painful.
Could someone please explain to me how the GSEs are in so much trouble? I always thought they'd be fine because they only buy "conforming" loans, and lower risk products. Is it the case that the lower risk products are falling apart more than expected, or is it the case that they bought more higher risk loans than previously thought?
If the GSEs had bought the same high-risk loans that the go-go lenders had, they'd be officially insolvent right now, not recognizing losses.
The people who bought the batshit insane loans have folded, declared Chapter 11, or been bought out by hedge funds.
The crisis can hit the GSEs just like it can hit the big banks. It is not stopping with "those loans."
You are not thinking about how much worse the GSE losses would be if they had not lost so much market share in 2004-2006.
"This facility looks almost identical to the discount window, except instead of banks coming to the Fed, the Fed forcibly injects the funds in an auction."
Nemo | Homepage | 12.12.07 - 10:14 am
Nemo, I like your insight a lot. There may be a subtle difference I'd like a Fed Watcher like you to comment on.
When the Open Market Desk calls for bids, a Primary Dealer gets kicked out if it does not respond.
TAF auctions are to depository institutions, and it is not clear to me if members of the Fed Banking System will be forcibly required to respond with bids, like Primary Dealers are to Open Market Desk auctions/operations.
In the interests of maximum nerdage, I'd also like to point out that the "no maximum financing in a declining market" rule that is mentioned here is not "new."
well, that's certainly nerdage, but i'm not sure it's maximum nerdage...i've seen you nerdier.
In the interests of maximum nerdage
This is what keeps me coming back.
OT - I think doc holiday / moe showers is a bot; moreoever, the same bot. Bots have come along way since crap like this.
Psychodave:
my understanding is that this differs from the Discount Window in that this is an AUCTION.
thus, the money is going to go to SOMEBODY, whoever the highest bidder is.
If, for example, the highest bidder is 2%, then the money goes to them at 2%. It's like free money! So all the big banks will be encouraged to bid for this auction. The money will surely go for lower rates than LIBOR and the Discount Rate, and possibly even lower than the Fed Funds Rate.
a bank would be a fool not to bid on it.
thus, the Fed has a way to forcibly inject the money, REMOVING the stigma of the winner of the cash as well.
IMO a genius plan, a LIBOR buster.
and a way to TARGET where the money is going as well...
It almost seems as if you detest the 'prudent.'
Please.
Look, I detest making this some morality play with "The Prudent" and "The Imprudent," the sheep and the goats, Us and Them. I always have.
I do not object to people acting prudently; I have spent my career trying to define and enforce "prudent" lending standards and operations.
I also think that in the grown-up world of our modern ecomomy, things are quite complicated. The fact that some people have been substituting debt for income may well more usefully tell us about the problems with our economy than it does about the moral character of Some People.
I am also tickled by the Pain Caucus, who want all "bailouts" to cease so that we can get on with our necessary suffering--and you know the WSJ is a charter member of the Pain Caucus--suddenly crying "Whoa, Nellie!" when it looks like that pain might hit Our Kind of People.
The trouble with a bailout is that it, of necessity, will always reward some of the guilty because no plan is perfect or foolproof.
The trouble with a credit crunch is that it will always punish the innocent, because that's what credit crunches do.
So whaddaya want? Action to try to forestall a credit crunch? Then everyone yells "Bailout!" No action to try to forestall the crunch? Then everyone yells "A tax on homeownership!"
I generally try to reserve my real contempt for people who just want it both ways.
well, that's certainly nerdage, but i'm not sure it's maximum nerdage...i've seen you nerdier.
Well, maximum nerdage is decreased by 5.00% in a declining post.
i almost typed that!
psychodave --
TAF auctions are to depository institutions, and it is not clear to me if members of the Fed Banking System will be forcibly required to respond with bids, like Primary Dealers are to Open Market Desk auctions/operations.
Well, the press release doesn't say anything about that. It just says:
Each TAF auction will be for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate).
...
The minimum bid rate for the auctions will be established at the overnight indexed swap (OIS) rate corresponding to the maturity of the credit being auctioned. The OIS rate is a measure of market participantsÂ’ expected average federal funds rate over the relevant term.
It does not sound like depository institutions will be required to submit bids, and the minimum bid will be the federal funds rate (essentially).
I think the idea is to bypass the Primary Dealers and get the liquidity directly to the banks that need it, just like the discount window itself.
Honestly, it does not sound like all that bad of an idea. The Fed needs to get busy in its role of "lender of last resort". As long as the collateral is subject to an adequate haircut, this is not a bail-out; it is an attempt to get the markets functioning again.
"Unfortunate for new homebuyers, who in many ways are having to atone for the sins of the Serin Generation. But new homebuyers with solid credit and a downpayment and with a reliable appraisal shouldn't be adversely affected."
Good point, but I wonder what a "reliable appraisal" is these days. Can appraisers really look into the future and predict the availability of financing, the impact of foreclosures, etc.? I think you'd have to be a brilliant economist or a fortune teller to accurately determine the value of my home today. If you simply base the value on recent comparable home sales, things still look rosy in my neighborhood, but they won't be so rosy in the coming months.
Fannie says that aligning risk with return is the motive for charging an extra 25 bps. If, however, we think in terms of market structure, we get a different view.
When there is a restriction on supply, suppliers typically get additional pricing power. Similarly, restriction on demand give purchasers pricing power, though that is rarer and it is probably easier to think in terms of supply.
Agencies face much reduced competition for their services right now. They are servicing a far greater share of mortgages than a year ago. As a result, conforming loans are all the rage, because everybody wants to be able to market loans to somebody, and the agencies are the easy route to go. Except that the agencies face portfolio limits. Those limits represent a limit on the supply of the service that agencies provide to the mortgage market. What do suppliers do when limits are imposed on what they can supply? The raise prices. Fannie has raised prices. There ya go.
I want a house that I can afford, whichever route gets me there quicker. And I want to be able to turn on the TV or read a major US newspaper and be told the truth.
"The money will surely go for lower rates than LIBOR and the Discount Rate, and possibly even lower than the Fed Funds Rate."
Yearning to Learn | 12.12.07 - 10:33 am
Thanks YtL. We differ in one issue:
The minimum bid rate for the auctions will be established at the overnight indexed swap (OIS) rate corresponding to the maturity of the credit being auctioned.
I see bad collateral costing more because of this.
You're not totally off base. In the same paragraph is:
Noncompetitive tenders may be accepted beginning with the third auction
Executive Summary: We've blown right through the Prophet Bagehot's admonition to
Lend money only at a penalty rate against good collateral
and are now deep in the territory of the Prophet's
the only safe plan for the Bank is the brave plan, to lend in a panic on every kind of current security, or every sort on which money is ordinarily and usually lent [even if it was only the FHLB doing the lending] . This policy may not save the Bank; but if it do not, nothing will save it.
Thanks much for your answer.
Tanta, this is OT, but would you like to comment? Matt Stichnoth at Bankstocks.com asks:
HOW IS THIS MORTGAGE CYCLE NOT LIKE OTHER MORTGAGE CYCLES?: The most notable takeaway from the mortgage-delinquency chart on the front page of today's Wall Street Journal: DQs on fixed-rate subprime mortgages are still way below their prior peak, even as DQs on ARMs blast through the roof.
A conundrum! Note that the same divergence seems to be going on among prime loans, too, only less so. We have our own theories about why ARMs are acting so much worse relative to fixed loans than they have in prior cycles, but would welcome suggestions from the house. Guesses and speculation welcome. . .
Good point, but I wonder what a "reliable appraisal" is these days
So do Fannie Mae and Freddie Mac.
That is, exactly, what this "adverse market fee" is all about.
It is a way of saying that until the market settles down and we can, actually, start appraising reliably (more or less) again, we will just tack that extra 25 bps on everything because we can't reliably say what's the sheep and what's the goats.
If you can't manage your risk exclusively with guidelines (appraisals in this case, although the same applies to things like FICOs), you manage it with price.
And I want to be able to turn on the TV or read a major US newspaper and be told the truth.
Well you can get the truth here, for free. As an added bonus, you have to actually use your brain to separate the wheat from the chaff and figure it out for yourself.
God bless the blogs.
The point to what the Fed did today, as far as I can tell, is to acknowledge that the mechanism for transmitting Fed policy is busted and try to fix it. The Fed has been careful to say that it's Fed funds reductions are aimed at risks to growth. The other stuff is aimed at the credit crunch. The problem is that, to the extent that stuff aimed at fixing the credit crunch has failed to work, Fed funds policy doesn't work, either.
The TAF auction are not an effort to flood the market with liquidity, necessarily. The TAF auctions are an effort to go around dealers and money center banks that have screwed up their balance sheets so badly that they are reluctant to deal in the funds market with small and medium sized banks. Now, small and medium sized banks can go directly to the Fed to get funds-like money. The OIS rate is, as the Fed's own announcement says, a market estimate of the average funds rate over the period relevant to the loan.
So, if a small bank is eligible to borrow from the discount window, it has the alternative of bidding at a TAF auction at a rate no lower than what is essentially a term Fed funds rate.
That expanded collateral business is a Bagahot issue, though. I have not seen what limitations the Fed will put on collateral. The BoC has announced that it will accept ABCP, unless the asset in question is a CDO.
oops:
good catch psychodave... I overlooked the minimum rate requirements.
I agree with you... and will restate:
"The money will surely go for lower rates than LIBOR and the Discount Rate, although equal or higher than the Fed Funds Rate."
"Here's the deal: if you are taking out a mortgage--any mortgage--in a period of time in which home prices are rapidly falling, the financial future of lenders and builders is uncertain, and bailouts are already on the table, you may wish to call yourself "prudent" because you're getting a conforming fixed and your FICO score is better than those subprime people's. You may, therefore, feel sorry for yourself because you'll pay that extra quarter."
Don't have to feel bad for long, cuz you can just yell "predatory" or "uninformed" or "don't speak the language" and get your loan principle reduced through a BK cram down. Oh what a wonderful world it is...
Fannie says that aligning risk with return is the motive for charging an extra 25 bps. If, however, we think in terms of market structure, we get a different view.
I agree that this is a matter of supply and demand, and also that it is trying to align risk with return.
To me, the key is exactly that it's just not possible in the current environment to focus the price increase laser-like on the riskiest loans. We're all risky now. So they went with an across-the-board fee hike.
I am sure their goal is, eventually, to go back to loan-level adjustments (i.e., making distinctions in pricing by loan characteristics, not blanket fee add-ons).
Another issue is just the nature of GSE contracts with seller-servicers. A lot of them still have some time left on them with those old lower g-fees. But they allow these postsettlement or "delivery" fees to be added on. So it's a way to bring new deliveries closer to "market" in the context of old master commitments. Eventually all the master commitments will get renegotiated at New Paradigm g-fees, and this 25 bps delivery fee can go away.
Tanta,
is this kind of action by the GSE - especially using a 25% or more down payment will acatually have the biggest impact on the market ?
Would some sanity return to the (used to honorable) profession of mortgage banking ?
REBanker:
although these cram downs also make me a tad nervous (they are like a reverse moral hazard), it's not like the borrower is getting off scott-free... they do have to declare BK, which does have its issues...
going BK hasn't been a big deal these last 10 years with the loosening of credit standards. However, does anyone doubt that a BK on your record going forward won't be a bigger deal? I doubt that future BK'ers are going to get immediate credit cards and home loans and car loans, etc...
now of course there are some very real situations where I have to wonder about this cramdown idea... such as borrowers who use a NINA loan to secure a million dollar home and then simply go BK keeping the home for a massively reduced principal... but it would seem that there would be some safeguard against that?
(Like, let's say a borrower who make $35,000/year bought a $900,000 McMansion with a NINA loan... would they be able to go BK and keep that house on a payment their $35k can "afford"??? don't get me wrong, the bank should eat it hard for giving out such a loan... but that seems a bit excessive.)
Tanta, slightly OT, but I've been wondering about this: Under the freezer teaser plan, the servicer will determine if the borrower can afford the rate after the reset. Since the rates on these 2/28's typically reset every 6 monts after the initial reset, what rate will the servicer use to determine affordability (qualifying rate)? Will it be in the servicer's best interest to "prove" that the borrower can afford the loan even after reset? Is there even a need to segment borrowers into that bucket? We know they can't afford it.
(Like, let's say a borrower who make $35,000/year bought a $900,000 McMansion with a NINA loan... would they be able to go BK and keep that house on a payment their $35k can "afford"??? don't get me wrong, the bank should eat it hard for giving out such a loan... but that seems a bit excessive.)
There are two issues here:
Do BK judges have to reward fraud? No. In fact, if the lender provides evidence of borrower fraud, relief is off the table. Let's not confuse allowing a judge to cram down with requiring a judge to cram down.
Second, as you note, if a lender is stupid enough to make that loan, what precisely is the problem with making the lender eat it?
But you forget about the Chapter 13 payment plan and enforced budget. Nobody making $35K a year can carry the taxes, insurance, and utilities on a McMansion. Let's be realistic. (BK judges often are, you know. They have actually seen it all.)
what rate will the servicer use to determine affordability (qualifying rate)?
The rate after the first adjustment is the only really relevant one. If they can afford that, they are presumed to be able to afford the subsequent ones.
My back-of-the-envelope calculation is that fully-indexed on these 2/28s is, average, 10.90 today. On average, the first adjustment cap is 2.32 and the start rate is 8.00. Meaning that the loans will hit 10.32 at the first adjustment. So there's 58 bps left to hit at the second adjustment (6 months later), unless LIBOR goes up in the interim.
They could just use the fully-indexed rate to decide whether adjustments are affordable or not. For a lot of these loans there might not be that much difference between fully-indexed and the first adjustment rate.
Calculated Risk: Subprime ARM Initial Rates
Mark - Perhaps the difference between fixed and ARM subprime DQ rates is because employment is strong. It doesn't matter what your payment is if you are unemployed. However, if you are stretched financially on the teaser rate an adjustment would be a killer.
"The National Association of Home Builders labeled the fee "a broad tax on homeownership." says it all for me.
NAHB labels and weall know just how bad that label "tax" smells, yes?
Ok, stinks.
Good heavenstoBetsy, there goes your hard earned ideology if you do not stomp this pestilence, "tax", out the second you see it.
So, it appears that the redistributive aspect of this "tax" levied by Freddie does not make it into the pockets of NAHB...
Can we look at the profit picture of the NAHB over the past several years to see how much real tax they paid and how much profit they extracted from those poor homeowners? Of those profits how much was donated to worthy causes...so we can see just how miniscule the redistributive aspect of their tax on homeowners is.
Last annoying thing: when I see "accepting collateral" I see the taxpayer carrying the losses and wage earners paying for investor incompetence...heisting...another duct tape fix, yes?
My back-of-the-envelope calculation is that fully-indexed on these 2/28s is, average, 10.90 today
i just got fresh data that says it's 10.94 today. aren't i helpful? i bet you were sitting on the edge of your seat, twittering with anticipation waiting to find out if you were off by a couple bps.
and by 10.94 i mean 10.96.
"Acceptable collateral" = whatever junk the banks having lying around.
Gotta keep Casino World open another day for more fees and bonuses, don't you know. The market will only be allowed to crash once the last suckers have bought in and all the big-wigs are positioned on the short side of things. Fleece the sheeple!
I gotta say it: Damn she's good. As FFDIC says "a frickin' master" in her element.
As a real estate appraiser, I appreciate this blog for the diverse financial outlooks and information. These national and regional perspectives are especially helpful to me in writing honest reports reflecting impacts on current local markets.
If appraisers had accurate crystal balls, we wouldn't need to work for a living, just predict events and collect the tribute money.
Yet many in the appraisal biz saw what has come to pass in the Wall Street world coming since about 2002 or earlier. And squawked about it, but very few listeners until about June this year. Had to hit the wallet(s) before the ears opened up.
The deceit involved has been well documented. Many, by no means all, real property appraisers played along
with the subprime lenders and those that played along were rewarded with repeat biz from the lenders. These
"numbr hitter" law (USPAP), rule and regulation breakers were among the enablers of the meltdown.
When will the vast majority of real property appraisals again be reliable? Some time off in the future, when the loan agents, loan advisors and account executives (formerly loan officers, but the word "officers" sounds as if these commission salespeople agree to accept real responsibility) have no say in who is engaged to do the appraisal. As one place to start.
Take the choice of appraiser out of the hands of the commission check
receipients and one part of the
veracity question will be solved.
Lenders still in business might also thoroughly review their approved appraiser lists and start sending appraisal requests to those competent appraisers whose names are not repeatedly involved in loans on the red ink side of the ledger. We are mostly still out here, despite having so many appraisal orders go to the enablers instead.
So called appraisers who do not tell the truth regarding property condition, neighborhood, value, etc. should be shunned at this point in time and into the future. However, greed being what it is, I'm not counting on it.
I am presently offering and aligning my services with those entities in need of forensic appraisals or analyses in order to root out past poor appraisal practices. Not a lot of demand for that service yet here in the PNW as there were not the lending excesses (by dollar volume and number of loans) here as in CA, FL, OH, MI, NV, AZ, etc.
See also
Appraisers Forum - Real Estate Appraisal Forums
C Mack
my first post here, thank you for the blog, the detailed information/knowledge and the free advice, CR and Tanta and most all fellow bloggers
..it's that the g-fee structure created huge concentrations
Very interesting. Is this another item in the minus column for consolidation?
One more off-topic on the Fed liquidity effort. At the press conference, a Fed spokesman said that daily operations will take discount window and TAF auctions into account, so that there is no change in the overall reserve position due to liquidity efforts. No easing.
I have been concerned about Fannie and Freddie being forced to take on risky loans or even doing so on their on accord. Although the precautions that they are taking seem modest, I'm glad that they are not acting in a way that will certainly lead to a taxpayer bailout.
Nice fade on the market today. When futures are too juiced without a strong basis, the market sometimes falls through the whole day.
....that's where the money is.
25 bps is nothing compared to 25 over valuation on the collateral.
25% overvaluation ahem
Tanta:
Here's another problem festering that will shortly boil over: Jumbo loans that have to refi. Wells Fargo recently instituted a charge of 1.50 for nonconforming CLTV's > 80%. Crikee. I think I saw Chase at 1.00.
Too many folks have been using that HELOC and they're close to the limit and will have to refi, when the lender refuses to renew the line, or rates go up and the payment shock get's 'em. It's not gonna be a pretty sight when folks expecting to be able to refi, (because they have decent credit and equity), won't be able to, or the rates will be exhorbitant.
With HELOCs impossible to sell in the secondary, there are few lender left originating them. The bloodbath will continue.
I want a house that I can afford, whichever route gets me there quicker. And I want to be able to turn on the TV or read a major US newspaper and be told the truth. - Average Citizen
And a pony? Doesn't this make you one of the bad guys? Truth is what you just said was "a house at your price, where you want, and now." That's how all these FBs got to be FBs is it not?
OT, but: You don't need to wait a half hour before swimming after lunch.
Debunking summer medical myths on MedicineNet.com
I would wait quite a bit longer than that to buy a house at this point, more like a couple/few years...
Very interesting. Is this another item in the minus column for consolidation?
Yep.
The g-fee/concentration thing has pissed me off for a long time. You have a "commodity" product here--a GSE FRM is a GSE FRM is a GSE FRM. Lenders compete on rate.
The GSEs got into the view that g-fees could be, sort of, "subsidized" by the depth of the counterparty's pockets. So CFC and WFC and that ilk got low g-fees compared to Podunk National. Now, Podunk might well produce better quality loans. But Podunk's balance sheet doesn't show "counterparty strength" the way the big gorillas' do (or, um, did).
So it's a vicious cycle: the big ones take on too much risk because the big ones get incentives to take on risk because they're big. They could compete on rate with Podunk (since they paid a cheaper g-fee), they didn't have to be as careful as Podunk, and now they're not lookin' as good for those warranties as they used to.
Yeah, Robert... that's what I said. Wow.
WFC looks like a much safer bet than CFC. Since their biggest selling agency product was Fast & Easy and the majority was 3rd part originated (wholesale and Correspondent) I've got to think their performance is less than what they expected.
I want a house that I can afford, whichever route gets me there quicker. And I want to be able to turn on the TV or read a major US newspaper and be told the truth.
I want to be able to buy a major national US Sunday newspaper that doesn't cost $6/week grumbleNYTgrumble
OT, but: You don't need to wait a half hour before swimming after lunch.
Yes, I know.
I may start experimenting with putting the sarcasm, irony, and light-hearted metaphor in colored font.
Nemo said, "...This facility looks almost identical to the discount window, except instead of banks coming to the Fed, the Fed forcibly injects the funds in an auction. The funds will go into the system, "stigma" or no...".
From the Fed release (as quoted by Kevin Depew over at Minyanville), "The data on Bids of individual Participants or of Participants will not be made public, except as required by law."
Looks to me like the real intent here is to shore up balance sheets with Fed magic money, and to do so anonymously. Anonymity for the banker is the difference. I'm not saying there is no scenario where that's a good idea. But that would seem to be the real difference here. They are hiding the banks' identity to encourage them to take money. They are proposing a non-transparent market to accomplish this outcome.
Nemo said, "...As long as the collateral is subject to an adequate haircut, this is not a bail-out; it is an attempt to get the markets functioning again...".
Here is a list from the Chicago FRB of collateral being accepted for these auctions (identical to discount window collateral, from what I understand). Note that mortgage-backed paper with no market price is lent out at 80%, and CDO's with no market price at 85%.
There are some pretty interesting collateralization (sp?) levels indicated on that sheet.
There was some discussion in previous threads of where exactly this becomes a taxpayer-financed bailout. This is probably not the last word on this question, but I'd submit that the Fed is stepping up right here and offering cash against shaky collateral because while they understand that's a risk, they apparently see a bigger risk beyond the horizon.
I wonder what that bigger risk looks like, and why there is so much effort to thwart discovery?
So whaddaya want? Action to try to forestall a credit crunch? Then everyone yells "Bailout!" No action to try to forestall the crunch? Then everyone yells "A tax on homeownership!"
A credit crunch for mortgages really can't be avoided. The entire mortgage system is based on home prices having a relatively low mean positive return and low standard deviation.
When returns exceeded mean during the boom, it was predictable to me but apparently not to the people who get paid huge amounts money to create security models on Wall St that historical estimates of the standard deviation are now both useless and way too low.
If the standard deviation jumps, the possibility of the property being underwater jumps for any LTV meaning more risk and higher interest rates.
My fear of the pro-bailout crowd is that they are trying stabilize home prices which is bad idea that will ultimately fail and cause a huge amount of damage.
Every pricing model I've seen says residential real estate is overvalued so downward price adjustments are expected. Expecting a sharp price decline might put in me in the "Pain Caucus" but I don't see an alternative.
The only alternative (which it is too late for) is the government trying moderate home prices in both directions, that is if prices start rising rapidly increase interest rates or change tax policy to make home ownership less attractive.
Dear Prudence,
Is it better to buy something now with low interest rates (6%), or buy something cheaper later with double the interest rate (12%) and a dollar worth 90-80% in real terms 18 months from now?
Novice - kp
[howling] Damn you, Prudence!!!!
Is it better to buy something now with low interest rates (6%), or buy something cheaper later with double the interest rate (12%) and a dollar worth 90-80% in real terms 18 months from now?
Dear Kenny:
Don't worry. When rates get up to 12%, we'll be able to put you in an ARM.
Prudence
Ok. I feel (am) stupid. Now is anyone willing to answer my stupid question?
Clueless But Trying
Kenny,
The interest rate on mortgages or any other debt for that matter is (approximately)
expected real interest rate + expected inflation + term premium + default risk premium
Which part do you think is going to drive interest rates to 12%?
If it's default risk, home prices will fall dramatically
MiC
On a $400,000 mortgage, that would mean an extra $1,000 in fees, almost certain to be passed on to the consumer.
Criminy! Thank da lawd the whole thing can be passed on to Norwegian investors.