"NEW YORK, Jan 25 (Reuters) - U.S. tax-free money market funds are selling insured variable-rate municipal notes amid fears that multiple-notch downgrades of troubled bond insurer ratings could hurt liquidity in the market.
The selling is driving up borrowing costs for some U.S. municipal issuers as yields on their daily notes have reset to 4 percent to 4.5 percent from the usual level around 2.5 percent.
"We are looking to take our position down to zero," said Steven Shachat, senior portfolio manager at $870 million Alpine Municipal Money Market Fund in Purchase, New York. The fund has liquidated most of its assets insured by Ambac, MBIA, FGIC and XL Capital Assurance, Shachat said."
So how about if you have a mortgage in excess of 417K that needs refinancing, you come up with the difference in cash, and just re-do the 417k only at a better rate? Like my daddy always said, don't ever feel sorry for somebody with more money than you!
I'm thinking that all these McMansions are exactly the problem, not the sub-prime. Like, just how many McMansions are sub-prime anyway?
Yahoo thinks "mortgage market veteran" is a sufficiently significant phrase to sigle out for special treatment. Is it Tantamount to "escaped convict" or "certified lunatic"?
The selling is driving up borrowing costs for some U.S. municipal issuers as yields on their daily notes have reset to 4 percent to 4.5 percent from the usual level around 2.5 percent.
Paint me naive, but I just don't understand the whole stimulus thing, and I don't understand how futzing with the conforming limit is going to fundamentally solve anything. This is not a liquidity problem but an asset-price problem. While raising the limit may allow loans to be off-loaded, how is it going to help those who are screwed by the current price of their asset? How is this going to stablize prices at all? That is the fundamental issue.
And for God's sake what is giving people $300 to $1200 dollars going to do for us? If people feel like a recession is threatening their status, they are going to pay off debt or put the money away. This consumption orgy is over. There are far better ways to invest the money and get results other than trying to have people spend money...especially when our taxes are going to HAVE to go up to cover all of this.
And while I've stepped up on my soapbox here, you know what I'm doing with my bonus this year? I am paying off every single debt I have (even my last grad school loans), putting the rest in cash, and buckling up my seatbelt until I can figure out what will rise from the ashes of all of this. And everyone who has half a brain (and I do believe that the majority of the public really does have half a brain) will do the same thing with whatever they get back from their taxes. I bought my primary residence in 1996 and could give a crap less what happens to RE at this point. All I know is at some point there is going to be a great buying opportunity and I'll position myself to be there when it happens...in equities, RE, or whatever sector that gets trashed now hits its low.
That's what smart people should do...write this all off and sit and be patient. Then we can all share a cigar with conjure
I was wondering if the abundance of agency MBS could draw away some demand from tresuries also.
I could see the govt in the short term wanting to compress the spreads between treasuries and MBS if they think that a better housing market will generate more tax revenue.
These traders just don't understand. See, jumbo mortages are risky - we all get that. But these $417K - $700K mortages are CONFORMING -- so they're less risky now.
I think it really is time to call for a financial Boston Tea Party. Throw your ARM/Balloon/Jumbo/teaser/no-doc/interest only loan into the ocean and dare the bank to foreclose.
I don't understand how futzing with the conforming limit is going to fundamentally solve anything. This is not a liquidity problem but an asset-price problem. While raising the limit may allow loans to be off-loaded, how is it going to help those who are screwed by the current price of their asset?
Raising the CLL is not intended to bailout individual FBs/homedebtors --it's intended to be a first step towards an industry-wide taxpayer bailout of mortgage lenders via the GSEs. Wave a magic wand and suddenly make most non-conforming loans into conforming loans and --Presto! Taxpayer's now the one on the hook.
The problem we are looking at here is not about credit risk, specifically. That's a separate issue. For the moment, it's not about prime or subprime credit.
It's about interest rate risk and prepayment characteristics of large versus average-sized loans.
The TBA market makes "average" assumptions about prepayment because (heretofore) the conforming limits functioned to keep these pools "granular." The traders are saying that they're not willing to price TBA trades the same way if they suddenly have these jumbos tossed in with very different prepayment behavior. The idea is that jumbo borrowers are more rate-sensitive (they refinance at lower rate-reduction increments than smaller loans do), and also they just skew averages if you throw a few $700K loans into a pool of mostly $230K loans.
So the suggestion is to put the LFKAJ in their own pools. Which just makes those "jumbo pools" that have a GSE guarantee. It restores "granularity," but of course it doesn't wave some magic wand that makes a $700K loan behave like a $230K loan. So the point is, we're back to the question of how exactly this move was supposed to lower the interest rate on jumbos by allowing them to be sold to the GSEs.
"I'll position myself to be there when it happens..."
You and everybody else. Real estate is dead.
Its really amusing to watch the dim-witted, cheaply-bought lackeys of the real estate industry that our legislative branch is, keep on charging up the paddles and jolting the corpse.
"C'mon, Joe, stay with me, C'mon...you can make it..."
You know HARM, I'm not that conspiracy-prone. How, for example, is this going to help the lenders with the current portfolio of now jumbos? If the appraised price of the asset and the terms aren't sterling, how the hell can the GSEs buy the loans? What percentage is this really going to help? What are the rules for purchase here?
Are most people here under the illusion that Congress & the Fed work for J6pack or something? I mean, c'mon, isn't it completely obvious who this is intended to "help"?
And we did all this because some unemployed guy was sold a loan by a crooked mortgage broker. Nice. Nationalize the banks, forgive all mortgages and start over!
"So the point is, we're back to the question of how exactly this move was supposed to lower the interest rate on jumbos by allowing them to be sold to the GSEs."
I guess that would depend on what the price the new pools were trading at.
oooo i like jubrimes OK Tanta, I get the behavior characteristics of the loan determine the value of the pool. I'm just not sure that this was specifically intended to lower the interest rate as much as it was to kick-start the demand for re-purchases of jumbo loans. Let's face it, in this climate, selling off these loans is very difficult and would be easier if the GSEs had the capacity to buy them. So that would grease the market a bit, or at least that's the theory at the gubmit level.
Listen to yourself Tanta. Granularity? Really, doesn't this all seem even more complicated than it needs to be? Who are you trying to save here? Is is the owner of the mortgage-backed security or the squatter upside-down on his mortgage? We can't save both. Pick one then design a bailout accordingly. All this "stimulus" seems like an attempt to re-inflate the bubble. Cut interest rates so all the subprime folks can re-fi at prime rates and call it a day.
Raising the CLL is not intended to bailout individual FBs/homedebtors --it's intended to be a first step towards an industry-wide taxpayer bailout of mortgage lenders via the GSEs. Wave a magic wand and suddenly make most non-conforming loans into conforming loans and --Presto! Taxpayer's now the one on the hook.
HARM
and finsihes off the entire mortgage brokering biz...
No wonder, as Tanta said, Mozillo was on his knees begging...
there will only be a few conduits to the gse.
OT: So if the Fed brings rates down to zero or close to zero, why keep any cash in the bank? Why not just put in under the matress? What would banks do for reserves?
Is this really about prepayment risk? Is credit/default risk not relevant to the pricing or are they just reluctant to admit it?
Yes, THIS ARTICLE is really about prepayment risk, not credit risk.
Of course, if by "this" you mean . . . the entire proposal to raise loan limits . . . or something . . . then I'm sure credit risk is something we'd want to think about.
Really, doesn't this all seem even more complicated than it needs to be?
Ah the unintended consequence...the irony would be more entertaining if there wasn't going to be so much pain meted out to the innocent while many deserving it go unscathed.
FWIW, any government bailout of the monolines may face a very similar reaction, the cost of government debt (bond rates) will most likely escalate dramatically if the government shoulders that load. And that will likely be MUCH more expensive in the long run as it impacts the servicing of all the national debt.
You know HARM, I'm not that conspiracy-prone. How, for example, is this going to help the lenders with the current portfolio of now jumbos? If the appraised price of the asset and the terms aren't sterling, how the hell can the GSEs buy the loans? What percentage is this really going to help? What are the rules for purchase here?
A: The people upping the CLL (Congress) also have the power to lower qualifying standards to whatever they want. If Congress decides tomorrow that the GSEs can start buying up underwater, delinquent Alt-A loans @150% LTV, they can.
But that's just the problem, everyone on this ship either floats until they get rescued or they go to the bottom together. You can't save people who paid 30% too much for their house unless they are stuck there until they aren't underwater anymore. That tosses sand in the gears of the RE market and makes prices actually stay down longer because the velocity of house moves decreases and people aren't trading up. So the whole market just stagnates for longer. The real way to do this is to let the market go down fast, for investors to recognize the losses, and for everyone to just get on with it. But this political interference is just going to make this longer and worse.
The best stimulus right now would be to put the government money into credits for investment and expansion or for percentage of corporate revenue related to payroll...but those things will never happen.
I agree with ipodius. Let the market go down fast. You can do this in bankruptcy court or you can create a guvmint low interest loan for everyone. Even the rich get bailed out. Is there a better way?
We've got Big Problems (characterize them however you will). Attempts to solve BP:
Super SIV (didn't get off the ground)
Hope Now (ehh, doesn't look like it's doing much)
Drop FFR (who knows? takes time)
Mono-line bailout (we'll see)
Raise the CLL (not looking to good)
If we extrapolate into the future (with admitted imperfect vision), the pattern appears to be:
Big Problems gets worse
Weak solutions to BP ineffective
Which likely leads to:
Big Problems merge into one Mega Superbad Big Problem
Some truly horrendous "solutions" will at least be proposed if not adopted (Smoot Hawley?)
Or not. I'm fully aware that history is replete with end of the world pronouncements.
However, the essential pattern I see is that the problems get worse, and the solutions are feckless.
It goes back to what Banker said in August (from memory), "If this thing lasts longer than a couple of months, then things are bad." We're into month 5 and counting.
Tanta, it seems like we are struggling to find a way to make everyone happy. Unless we re-inflate the bubble, that is impossible. We keep shooting down all the trial balloons and never get to the real answer which is a bailout for either the homeowner or the MBS investor. I don't know which you prefer, but the more we tinker, the more complicated this gets. No one can win. Someone wil lose no matter what we do. So we as a society need to pick a horse and ride it. Is it better to enforce contract law or is this situation so threatening that we have to bail out everyone?
Tanta, why wouldn't they put into the new Jumbo/conforming loans a prepayment penalty for refinancing? Could this reduce the timidity of investors to buy into these pools if they new that they would get a penalty fee if the higher balance loans were to try and refi? Also, can you see any scenario where home loan rates could get much lower than 5% to where these homeowners would want to refi anyway? Or do they refi back into 30 year loans to reduce their payments?
I hate to say this but the best package that could be done at this point is to make it EASIER for people to walk away. Think about it: less money spent on legal fees, accurately priced assets, losses realized quicker, and the system kick-started by cheaper houses and more available mortgage money. Also, credit scores tweaked to be better for those bowing out instead of being forced out at great expense. Or even a federal loan program designed to help those burned in this.
Let people out, no taxes on what is owed, better credit scoring, special loan programs, and let those who didn't understand what the word "risk" meant realize losses earlier and therefore lower. Hey, maybe I should be running with Hillary! lol
Good news for O-Joe and Sebastian, just in time for their weekend: Q4 earnings are now down only 47-52%, year-over-year, up from down (I'm dizzy, now) over 60% year-over-year.
Good news, kind of, sort of, I think, maybe, potentially.
I am seeking a radical solution only if the threat is real. If all this "depression" talk is gross exaggeration, then just let the subprime slime work it out in bankruptcy court. But if the bad debt is so pervasive as to threaten the entire financial system, then we have to step in.
Tanta, maybe I'm not understanding you. If so, I apologize. I'm a big picture guy and get frustrated with the tinkering. Someone will lose. We have to choose.
Paul, I'm a firm believer in conjure's clock. We are very close to global systemic financial meltdown. Just remember the leverage out there...it's in trillions. If only 5% unwinds, we're in deep deep doo doo. The theme is really (to co-opt that old campaign phrase) "it's the leverage, stupid".
ipodius, if we really are close to meltdown, I'm not smart enough to know the way out. But we survived the "great depression" and we'll get through this. Really, I can't believe it is that bad.
diversified financial services provider, will report its 2007 fourth quarter and full-year earnings on Tuesday, January 29, 2008, by press release at approximately 8 a.m. EST. Given the pending merger with Bank of America, announced on January 11, 2008, the Company will not hold a webcast or conference call."
In his remarks, Mr. Greenspan admitted he was caught off guard by the rapid growth in subprime mortgages, saying there was a lengthy delay in data coming in on the products and that when he finally saw official tallies, he couldnt quite believe it.
Somehow I believe this is still going on by many many people paid to know better.
This is amusing. Didn't they ask the traders first ?
So, so far, based on just on the additional prepayment risk for jubprime loans the choices are:
all agency securities get tainted by pooling it all, require higher interest rates at that end and so also does the end buyer. Not too good there.
create separate jubprime pools which, just for additional prepayment risk have higher interest rates so the ones taking out jubprime loans have higher interest rates - isn't that what this was supposed to fix ?
the GSEs carry the jubprime loans on their books and don't securitize loans - hampers their ability to source extra loans surely - isn't that what they wanted ? how much would their capacity be constrained I wonder - I'll have to look up what they currently carry on their books - held for investment or some such I suppose ?
Any other options ? And this is all just based on the extra prepayment risk !
Equilibrium equations apply just as much to money balance equations it seems. Too funny.
And btw, Thanks Tanta for a concrete example of the necessary consequences of this proposal.
I stand in utter astonishment at how putting this pig into fannie and freddie is going to change the fact it is a pig.
How do you account for all of the folks that are underwater by virtue of declining appraisals and comps?
Or do we just save the 20% down folks on the way down before their down payment is gone to money heaven?
Further, I question how many folks can qualify under full doc conditions?
So this helps the five honest folks out there who bought a house and need to refi- if they can get it done in time.
Once again our politicians have administered a band-aid to would that requires cauterization and stitches.
Gonna fester and get uglier, but looking at wall street, it is obvious that a lot of institutional selling into short covering is going on in the walking dead- check out that huge rise in dead homebuilders- tell me that isn't just some engineered short killing.
Now, what happens when next quarter's numbers are even more dismal?
What needs to happen is that the dead need to be put out of their misery, and the banking system needs to hit the giant Reset button.
Desperate searches for additional stockholders simply resemble searching for a bailout- the last pocket picked will be the taxpayer.
If all of this was so great, how come nobody is selling stock to finance buying homebuilders and banks?
Somehow I think the transfer of Jumbo's to GSE's has more to do with socializing the risk/losses than it does with providing a low-cost alternantive to a homebuyer.
So even with the Tanta truth they may still go for it. May....May? did I just use the word MAY...silly me...will.
This is nothing more than another Milky Way scam to try to hide balance sheet losses and avoid mark-to-market accounting for a while longer. There have been several proposed schemes and there will be more, but they solve nothing as they aren't intended to solve anything. They are intended to obfuscate and confuse, and perhaps during the confusion, the pigmen will offload as much garbage as possible on SWF's and CB's (if we're very lucky).
Tanta, why wouldn't they put into the new Jumbo/conforming loans a prepayment penalty for refinancing?
Well, they could do that, but you know the GSEs have historically been very hostile to prepayment penalties. They consider that basically anti-consumer unless the borrower is getting a below-market interest rate.
My point with "LFKAJ" is that all we're doing is changing the name. Yesterday they were called "jumbo," today they're called "conforming." That changes nothing about the underlying loan, or the impact of loan size on credit quality, interest rate risk, etc. It's sort of like the teacher going in and changing the curve so that all the kids get an A. That doesn't change the answers they gave on the tests.
Maybe the GSEs will decide that the LFKAJ loans have to have prepayment penalties. But that right there will be doing what Lockhart is demanding: not just yanking up the loan limits, but running these new bigger loans through the analytical process and making sure the terms and pricing are appropriate.
I really do think that a lot of people are behind this plan because they think that we can just keep having oversized loans on overpriced properties at the "same risk" as moderately sized loans on moderately priced properties. Just by declaring them "conforming." If that's what Congress is thinking, then they're going to be a touch disappointed by how this works out.
With the Stimulus Plan, Bank bailout plans, rate freeze plans, possible monoline insurance plan, and now rasing the GSE limits what else can the US get into being the backstop for? Here is my idea:
Loan Shark Reserve Insurance - You know making money in the underground economy is not easy. By definition ALL of your clients are Subprime Slime. Often, not even a broken leg or a cracked cranium can get a deadbeat to pay his marker. At times like this, street credit contracts, and you get loan shark deflation. This is extremely dangerous because the cost of credit goes way up, and people can face some brutal terms. The government should institute a plan to have cash reserves available to these underworld banks. Only the full backing of the US Treasury can ensure a smooth stream of funds to the strapped true lenders of last resort.
From Association of American Railroads (1/24/2008):
"Carload freight totaled 325,415 cars, up 5.6 percent from last year. Volume was up 10.0 percent in the West and 0.1 percent in the East.
Intermodal volume, which is not included in the carload data, totaled 230,771, up 3.0 percent from a year ago. Container volume rose 4.1 percent while trailer volume was off 0.9 percent.
Total volume was estimated at 33.6 billion ton-miles, an increase of 6.7 percent from the third week of 2007. Freight volume in the comparison week from last year was affected by severe winter storms."
I am assuming this increase in rail may be related to the rise in fuel costs, but on the other hand Intermodal is up 3%. Forestry off but improved, and autos higher than 2007.
I am confused. Anyone on the blog or in the industry who can help me understand these numbers? I understand this is most likely a coincident indicator, but if 'just in time' exists, these numbers suggest the underlying economy is doing well. I am assuming Ben watches these things.
Tanta, at present everybody is guessing at what kind of interest rate is need to make a good loan. We're in a new world now, looking a house price declines - even from here - never yet encountered. The effects on loan risk are unclear. Fannie/Freddie have placed a bet with their implied government money that it's not much worse than we've seen before. The jumbo market is betting it's a good notch worse than we've seen, but nothing outrageous. IMO it's the risk of loss (which the GSEs can cover up) rather than prepayment risk which is freezing up the jumbo market. If there's enough padding on the interest rate and down payments it should be salable.
IOW the problem is basically how much padding is needed for people to be willing to touch a Jumbo Fannie.
I don't know about other commenters, but I'm working harder than ever to understand what's going on. Each new harebrained scheme requires a new ubernerd post about some heretofore undiscovered realm of wonkery, and lotsa new brow-furrowings to understand it.
Yet, somehow, I seem to understand things better than Washington does. How reassuring.
I just had a pretty detailed scenario laid out for me at a measly 1% uncontrolled. The margin/capital calls would be horrendous. Lets just say we all better pray it doesn't happen...
We're in a new world now, looking a house price declines - even from here - never yet encountered.
Is it really that hard for financial institutions to understand that, in the absence of other data, it's reasonable to bet that housing will probably return to its historical norms--in terms of rent/price ratio or appreciation since 1997 or whatever?
Are they so much smarter than me that they chortle at the suggestion?
"Left alone with big fat Fanny, / She was such a naughty nanny! / Hey big woman you made a bad boy [???] out of me! / ... /
Hey, hey!... Hey listen here, / Now I got mortgages on homes ..."
Or if you're feeling a bit more cultured, here's a really gross misuse of Caravaggio's Saint Jerome.
"Tanta, i think this calls for an UberNerd on convexity...
bacon dreamz | 01.25.08 - 7:05 pm | #
Oh no you don't... Me thinks sir bacon already knows much of convexity, duration and all that other bond stuff...
I'd be more interested in what if any is the rule of thumb used to determine how much of a rate drop is needed to see an uptick in refi's. Is 50bps enough to get 5% of the pool to refi, 100bps gets 25% to refi, etc...
I think we need for Lockhart to come right out and say in no uncertain terms that either the GSEs have no government backing or they have it. This is another massive unfunded obligation of the government, maybe the biggest.
My point with "LFKAJ" is that all we're doing is changing the name. Yesterday they were called "jumbo," today they're called "conforming."
Tanta
You've hit on a superb one liner way of starting and compressing the explanation !
As you go on to point out:
" That changes nothing about the underlying loan, or the impact of loan size on credit quality, interest rate risk, etc. "
Separately, I use the following one liner to open up explanations of the "subprime mess", viz: "People lent money they didn't have to people who couldn't pay it back".
"NEW YORK, Jan 24 (Reuters) - Corporate finance managers are starting to find themselves cash-strapped by one of the very financing tools they use to manage cash flows.
Auction rate securities, debt instruments once touted as a highly liquid cash management strategy, have been hit by the credit crunch and are failing to attract bidders. For companies, the result is that cash once thought to be readily accessible may be locked up indefinitely.
Auditors and regulators are also growing concerned that companies may not be telling investors properly about their exposure to the vehicles."
"ARLINGTON, VA The American Trucking Associations advanced seasonally adjusted For-Hire Truck Tonnage Index jumped 4.1 percent in December 2007, after rising 0.9 percent in November. The latest increase was the largest month-to-month gain since a 6.2 percent jump in December 2006. The not seasonally adjusted index fell 8.2 percent from November to 102.7.
On a seasonally adjusted basis, the tonnage index jumped to 116.7 (2000 = 100) in December, its highest level since January 2006. Tonnage was also up 1.4 percent from a year earlier, marking the first sequential year-over-year increases since May and June 2006. Despite these increases, however, the tonnage index declined 1.4 percent in 2007, following a 1.7 percent drop in 2006.
ATA Chief Economist Bob Costello said the final two months of the year were surprisingly good given the current economic environment, the financial crisis, credit crunch and weak housing market.
Both the month-to-month and year-over-year increases were very encouraging, Costello said. However, the supply chain has changed during the fall freight season, leading to better Novembers and Decembers than in the past, so we shouldnt read too much into the recent data at this point."
Sure seems like a strong showing considering how much everyone is banking on a recession.
What's the mystery? Rail freight tonnage is a measure of commodity demand and movement. We know that the world can't get enough commodities, especially grain.
Rail freight movement does not measure the flow of finished goods and services in the economy and that's what's sinking.
Also, as oil prices go up, trucking becomes more expensive due to diesel and rail becomes relatively more competitive.
If you want to measure the economy, look at trucking, not rail.
I can't quite figure out the hand-wringing about GSE's bailing out anyone.
Tanta's made it pretty clear. The GSE's have standards that have not been relaxed, so they can't buy garbage. OTOH, if their standards are relaxed to buy garbage, then they can't turn around and sell it to anybody else (i.e., securitize it). That leaves their held in portfolio, which would run out of space damned quick.
Let's look at trucking.
However, the supply chain has changed during the fall freight season, leading to better Novembers and Decembers than in the past, so we shouldnt read too much into the recent data at this point.
Now I have more questions. In what way has the 'supply chain' changed?
What are the chances of raising the CLL being stripped out of the "stimulus package".
I'm guessing slim. But if more people come out against it, could it be done?
MtHood: I'm not sure it's so slim. The key is the Senate. Remember, Bush & the House Dems came out with this plan a couple of days ago. The Senate was not in on the deal. The House and the Senate must come up with a compromise in order for this to pass. Also remember that Bush & co are in a hurry to get this thing through so they can hand out the checks. If enough (non-California) Senators realize that this could mean less loans available for people in their states (bigger loans means less total loans) I suspect they'll raise a ruckus over this. If the ruckus gets loud enough, I think the proposal could get dropped in a hurry.
barely: I think we need for Lockhart to come right out and say in no uncertain terms that either the GSEs have no government backing or they have it.
It's not like this is a new concern. Here's a quote from Rick Carnell of Fordham University at an AEI seminar from Feb 3, 2005 about what to do when the GSEs become insolvent.
Now, in fact, if creditors would associate perceived government backing of GSEs with the words national integrity on the Alexander Hamilton statue in front of the Treasury, which means we pay our bills; if that association is there, then these things, thisthen that should be on budget. It should be reflected in the creditthe subsidized credit should be reflectedI see the OMB people are smilingshould be reflected in government spending and it should be voted by Congress, and that would certainly be a different world for GSEs.
He is talking about the Christmas stuff showing at retailers right in November and early December. It used to be that you would see a upsurge in Sep/Oct shipping,gearing up for the holidays. With better warehousing and tracking you can actually ship much later thereby keeping less iventory on hand at the retailer.
I would say our early season spike is off by 30-40% with this spread into Nov/Dec...
The "stimulus" checks are supposed to hit around May. Since by then the FFR will be in the 2's, the DOW below 10K, and gold above 1K, it wouldn't surprise me to see a lot of that money headed to the local coin shop.
Pardon my confusion, but I'll bet I'm not alone.
We have a financial services depression, an RE/CRE depression/pending recession, a health care expansion (with inflation) and the service industry in expansion without inflation. Yet basic goods show good expansion in a 'just in time' environment. The consumer is slowing, but still purchasing.
Just where in the life of a simple Midwesterner is this Crisis that requires Acts of Congress and bail-outs of the rich (not You rich)?
If it were really a crisis, I'd feel free to do the Kwame.
Show me a link to the legislation raising the portfolio caps and lowering the standards. Until then, it's just speculation.
You know we generally think alike, but let's not get too far ahead of ourselves. The downturn is already far outpacing DC; they haven't passed a single piece of legislation yet and it's been a better part of a year since containment was lost.
This is an election year, too. The stimulus proposal is by no means a fait accompli.
What I really want to know: what do I do with my core treasury bond fund (beautiful capital gains and interest the last year, and safe (supposedly)). Risking Tanta's ruler for OT here.
"Fannie and Freddie loan limit growth could run into opposition in Senate"
"Sen. Richard Shelby of Alabama, the senior Republican on the Senate Banking Committee, agreed. Raising the loan limits without stronger regulation "enables thinly capitalized entities with recent accounting problems to provide a high-risk benefit to the wealthiest Americans without any real consideration of the need to do so or of the risks it presents to the taxpayer," Shelby spokesman Jonathan Graffeo said in an e-mail."
It aint over. At least some of the Senators realize the underlying issues.
I have to assume the rise in homebuilders the past two days is almost exclusively due to the proposed raise in the GSE conforming limits. That's the only thing that makes sense, but I guess obviously things don'thave to make sense.
Still, the fact that DHI's share price is now back above where it was in early September is absolutely mind-blowing to me.
find something else to invest in when rates hit 2 percent (where the secret discount rate is).
What, I don't know yet. But the flight to quality continues...
tj-
what, you want to read legislation before it become law? Not with this congress. That is what the compromise committee does behind closed doors.
I predict that fannie and freddie will get larger guarantees to take this dreck on under their guarantees, including a way to put it back to the taxpayers when it goes south.
I would probably buy fannie mae if I really thought it through- the old line banks will profit mightily from the elimination of that upstart wall street innovative financing.
"CIBC May Have $2.63 Billion Backed by SCA (Update1)
By Doug Alexander
Jan. 25 (Bloomberg) -- Canadian Imperial Bank of Commerce probably has $2.63 billion in U.S. subprime investments guaranteed by insurer Security Capital Assurance Ltd., which lost its AAA rating from Fitch Ratings, Blackmont Capital analyst Brad Smith said.
Canada's fifth-largest bank, which has already announced $3.2 billion in writedowns on its subprime investments, faces additional costs from insurer downgrades, Smith said in a note today. Fitch yesterday cut its rating five levels on Hamilton, Bermuda-based SCA's XL Capital Assurance and XL Financial Assurance. Moody's Investors Service and Standard & Poor's are also reviewing their rankings.
If this proves correct, the Fitch downgrade and rising probability of Moody's or S&P following suit could accelerate additional losses,'' Smith said in an interview. Smith, who rates the stocksell'', didn't estimate losses."
Tanta: I want to check my logic here. Do you find anything wrong with this formulation:
The GSEs have a finite amount of money to loan out.
Therefore: If the conforming loan limit is raised, the number of loans that are made will go down meaning less loans overall.
Oh heck, write your senators if you live in CA and tell them this is just stupid. Boxer might listen, even if Feinstein is a lost cause.
Donna: yes, Californians should definitely do that. However the argument you would make would be that it's fiscally irresponsible due to trouble at the GSEs. Outside of CA (and the NorthEast) the argument is more compelling and will catch a Senator's attention: Higher CLL means less loans available in your state. That way we get them fighting with each other
I had a Federal Judge tell me in his chambers a long time ago that most of his cases involving $$ were simplified in his head greatly by asking "Who benefits?"
Convexity...How dare you bring that up. GAH!...this is brain nubing stuff that will KILL many posters. Talking about the difference in convexity in same duration, same yield bonds might cause some to jibber and drool on their keyboards causing severe damage to their keyboards.
Let Tanta do her thing. Here's a great resource from invetopedia to those who want to melt their brains.
gatsby,
as a victim of unreality in the homebuilders, I can attest to the violence of the climb. I also suspect that is partly hope from raising the limits (although several of the biggest gainers deal pretty much exclusively in conforming already like RYL), and partly from the hope that all will be miraculously cured. I suspect they will resume their crawl to the grave when the Fed hands everyone some disappointment with their lack of movement on interest rates. Why should the fed move again if they were buffaloed by the SocGen unwind?
I think the market is going to be very unhappy by the end of next week with congressional action moving at the speed of a glacier.
The GSE's have standards that have not been relaxed, so they can't buy garbage. OTOH, if their standards are relaxed to buy garbage, then they can't turn around and sell it to anybody else (i.e., securitize it). That leaves their held in portfolio, which would run out of space damned quick.
TJ,
The GSE's don't need to "turn around and sell [crap jumbo loans] to anybody else. In fact, that's exactly the point for raising the CLL and relaxing standards: to leave the GSEs (proxy for "taxpayer") holding the bag. Individual private lenders and banks are not necessarily "too big to fail", but Fannie & Freedie certainly ARE --and the banksters know it.
o no no, Misean, the whole point is that Tanta would make it interesting and enjoyable to read about (and maybe even include a picture of a Pig) for people whose brains it might otherwise melt.
This is an interesting question whether increasing the loan limit will increase mortgage rates...I can see the logic but as scared as lenders are right now, I doubt they would be willing to make stated income or high risk loans any more to anyone. LFKAJs will only go to creampuff home buyers and refinancers now who probably don't need much help anyway; I have no doubt that if conforming rates do rise "increased risk" will certainly be the excuse. If all this does is make borrowers with high credit ratings more likely to refi because its easier to qualify at 5.5 percent than 6.75 then it will only help on the margins.
RE: the increased conforming amounts themselves... In some high priced areas of the country, this increase is long overdue because buyers in these areas always pay a rate premium unrelated to the default risk they actually represent. For example, you cannot get a conforming loan on one bedroom condo in Silicon Valley--a place most of you would consider living in, at least--for $417K or less, and haven't been able to in almost a decade now; conforming loan financing is virtually non-existent.
Raising the limit--so long as it is related to the prices in a given area-- rationalizes things. If we are going to have programs which provide federal guarantees on mortgage loans (and to me that's another huge question mark), at least let's be fair, and cognizant of regional differences.
If they keep it, then they're obviously putting themselves at risk. If they're at risk, their guaranteed bonds are at risk and therefore no longer AAA.
Furthermore, if any Democrat really likes their chances of taking the White House, why the hell would they want to torpedo their first term by fomenting a GSE crisis? The monolines are nothing compared to the GSEs.
I'd be more interested in what if any is the rule of thumb used to determine how much of a rate drop is needed to see an uptick in refi's. Is 50bps enough to get 5% of the pool to refi, 100bps gets 25% to refi, etc...
The problem is it doesn't work on a "rule of thumb." And bacon dreamz is correct that it would take a long UberNerd post on convexity and option pricing to really answer that question.
The short version: different loan characteristics produce different kinds of refi behavior. In general, the bigger the loan, the smaller the rate drop necessary to see the borrower refi. That's largely because small decreases in rate mean big dollars on big loans (and smaller dollars on smaller loans). Also, jumbo borrowers aren't as sensitive to shelling out upfront fees.
So, there's a fancy set of calculations to arrive at prepayment expectations, and when you plug jumbos into it you get different results than if you plug in (traditional) conforming loans.
Therefore, traders pricing TBA don't know how to value a pool that's a mix of conforming and jumbo. If they were forced to, they'd price it all like jumbo.
TBA pricing is important because, basically, this is how you get rate locks 30-60 days prior to closing. Unless you want to not know what your rate is until the day you sign the note, the lender has to be able to have some sort of forward trade out there that lets the lender set your interest rate that far in advance of actually having a closed loan to sell.
I guess some folks are wondering why anyone should care about this. Well, I for one would care if adding jumbos to agency pools raised interest rates for conforming loans but kept jumbo rates unchanged. That's a direct subsidy of jumbo borrowers by conforming borrowers.
Perhaps, but that uber nerd Accountancy 510 post on last Saturday is still giving me flash back headaches. This I have more of a handle on...by comparison.
Of course I'd read it. And be a fool not to. Still...can we risk this:
I honestly don't think Democrats (or any politicians) really understand the scope or causes of what we're facing, nor can they see past the next election cycle. I doubt they understand that by upping the CLLs and eliminating standards, they would in effect, be dooming the GSEs and possibly their own careers.
The pig men and sheeple are bleating for them to "do something!" and that's exactly what they're doing. There's a reason they call it "panic legislation".
The GSE's don't need to "turn around and sell [crap jumbo loans] to anybody else...to leave the GSEs (proxy for "taxpayer") holding the bag...
HARM
They can't just keep them on their books - that would affect their capital requirements; you've need the regulators to sign off on it; they have portfolio caps - FNM and FRE have been really bad boys and there's a voluntary consent agreement to change their ways from 18 months ago:
The full agreement is at the same site. Legislation to change THOSE things would be needed if they don't securitize and just keep the loans on their books. No such thing is proposed at the moment.
Yes, but "do something" is usually a lot of show and no real go. I suspect this is much of the same -- they want to look like they're doing something, even though they really aren't. Kind of like that HOPE NOW thing.
Tanta,
I think the most likely outcome is a blend, with lower jumbo, and higher conforming, but most of the reasons why gse's have traditionally enjoyed an advantage was the underwriting standards and access to deep stable capital for underwriting purposes.
Remember the gse's were darned near frozen out of the coastal markets from 04 on. They want that business back.
Now, the best thing would be a new fk category, but as was mentioned above, it has to be cheap enough and loose enough standards to keep the jingle mail from becoming an avalanche.
RE: the increased conforming amounts themselves... In some high priced areas of the country, this increase is long overdue because buyers in these areas always pay a rate premium unrelated to the default risk they actually represent. For example, you cannot get a conforming loan on one bedroom condo in Silicon Valley--a place most of you would consider living in, at least--for $417K or less, and haven't been able to in almost a decade now; conforming loan financing is virtually non-existent.
"Long overdue"...? "rationalizes things"?
Oh where to start with this one?
Jonas, the reason why you "cannot get a conforming loan on one bedroom condo in Silicon Valley" has mighty little to do with the current GSE CLL (which btw, was under $250k as recently as 2000), and a whole lot to do with the massive, Fed & government spawned risk-ignoring, cheap-credit-fueled housing bubble over the last 10 years. You might want to do a little research in the CR archives.
Okay, I'm usually on board w/ Tanta and typically only have to lurk and enjoy, but I'm not sure I really see what all the fuss is about on this one.
This is not much more than a political sop that's not likely to have much if any impact. At the margin, it will add some liquidity to high quality jumbos and might bring pricing down (yes, I understand the point Tanta is making that there's no proof that pricing is "wrong" or "bad" on Jumbo today). As I see it, US banks don't have much balance sheet available for Jumbo, and every day that they have writedowns, they have less balance sheet available. The GSE guarantee on what used to be private label MBS will probably help get the secondary market moving again for jumbo loans. That's a good thing if you care about the US economy (and if I have to prove my chops, I actually moved towns in '05, which meant I sold my place -- I have rented ever since).
But as for HARM's concern about moving the garbage loans from bank balance sheets to the GSE guaranteed MBS, (1) that's not going to happen and (2) you fundamentally misunderstand how the GSEs (and all insurance companies) work.
(1): The on balance sheet garbage will not be GSE eligible b/c there won't be enough equity or income to qualify.
(2): The GSEs have a great business model (don't forget that Freddie's accounting issue was UNDERREPORTING earnings so they'd look smoother in the future). They collect g fees, put their stamp on the securities and then when there's a problem loan, they put it back to the lender 9 times out 10. What a sweet business! Collect insurance premiums and put loans back. Brilliant! This is why the GSE risk to the US gov't / taxpayer has always been overstated.
To sum up, I guess I'm with TJ & the Bear. This is meant to grab headlines and allow congressfolks to show their constituents that they are "doing something" but it ain't really going to do very much. I've got no problem with Kabuki Theater gubmint (like Hope Now). It's things like the medicare prescription plan that really screw us.
that would affect their capital requirements; you've need the regulators to sign off on it;
That should, take about 5 seconds (lol). And if it takes any longer, those stubborn "regulators" can just be replaced with more compliant political hacks, per usual.
In some high priced areas of the country, this increase is long overdue because buyers in these areas always pay a rate premium unrelated to the default risk they actually represent.
Jonas: I suppose the other way to look at is is that the people who have to get Jumbos at the higher rate now are paying closer to the real risk premium as determined by the market.
Well, I for one would care if adding jumbos to agency pools raised interest rates for conforming loans but kept jumbo rates unchanged. That's a direct subsidy of jumbo borrowers by conforming borrowers.
Tanta
Yup, I decided to get off my fat fannie(USA usage) and emailed my CO senators making exactly this point. I really don't usually do this - but this thing got my goat - the whole point of GSE was to:
For more than 30 years, Fannie Mae's mission has been to provide products and services that increase the availability and the affordability of housing for low-, moderate-, and middle-income Americans.
Anybody who tells me that somebody who qualifies for a $735,000 mortgage is middle-income or lower is a w*nker.
btw, as pointed out by housingdoom the buggers have changed the mission statement, to:
We exist to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market.
(1): The on balance sheet garbage will not be GSE eligible b/c there won't be enough equity or income to qualify.
Price Stout,
If Congress wishes to change GSE "eligibility" requirements to allow underwater and/or delinquint loans, they have that power. This is what's fundamentally different about government vs. the private sector. They can re-write the rules whenever they please.
And if the situation gets desperate enough for their "base", not to mention mobs of angry FBs/voters, they just might do so.
Tanta wrote, "I guess some folks are wondering why anyone should care about this. Well, I for one would care if adding jumbos to agency pools raised interest rates for conforming loans but kept jumbo rates unchanged. That's a direct subsidy of jumbo borrowers by conforming borrowers."
My point is that superficial measures can be easily agreed upon, but when it comes to substantive changes there are a lot more factors to consider. There are lots of people in DC that won't go along, and even more constituents out there that would be majorly pissed off. Heck, just look at the ill-fated immigration reform bill.
I completely understand the point of the article, CPRs and convexity, and the traders' complaints.
But I see I wasn't clear. When I say I don't see what the fuss is about, what I mean is the fuss over increasing the CLL. The CPR modeling issues can be solved, and there are workarounds that Tanta herself even offered up like separate pools.
So, I'm in agreement w/ the traders' complaint.
I'm not in agreement that raising the conforming limit is a disastrous step 1 in a path that leads to a taxpayer bailout of the mortgage or banking industry. I think it's a move that's 95% for show and will have some marginal (beneficial) impact on jumbo mortgage liquidity.
I guess what I'm looking for is a non-hysterical, non-conspiracy theory argument for why raising the CLL inextricably equals or leads to a bailout. I'm perfectly willing to consider that argument, I just don't happen to see it myself right now.
This is the point I've been trying to make all day here (but evidently seem to be doing a poor job of).
I repeat:
If Congress wishes to change GSE "eligibility" requirements to allow GSEs to purchase underwater and/or delinquent loans (to "socialize" losses), they have that power. This is what's fundamentally different about government vs. the private sector. They can re-write the rules whenever they please.
I don't think that recognizing the above truth automatically makes me a conspiracy nut, or doomster. This is just the political reality of the situation we're facing.
The politicians and banksters will do whatever they think is in their best interests to avoid losses, economic, political, or otherwise. Whether or not those actions really are in their long-term best interests is another matter.
Sorry dude, but you don't know CA. I have a very dear friend who makes $65K who sold her condo in 2005, got $80K in payout and bought a $505K condo with a jumbo neg am for $425K. When the neg am reset she took out a toxic IO. She couldn't afford that either but the shiesters gave it to her.
She has 3 kids, divorced, and the eldest will be 18 in 16 months (meaning the child care money from hubby goes to 0 then).
She is not rich. She got swept up into the bubble. This is repeating throughout SoCal. Criticize all you want...but here those loans didn't necessarily go to the RICH...the people who your envy is pointed at.
(def of envy:
"Aristotle (in Rhetoric) defined envy "as the pain caused by the good fortune of others", while Kant defined it as "a reluctance to see our own well-being overshadowed by another's because the standard we use to see how well off we are is not the intrinsic worth of our own well-being but how it compares with that of others" (in Metaphysics of Morals)."
She was foolish and possibly defrauded. She and her kids (3) are paying a price.
Don't be so fast to have Envy drive your decision making, or your analysis. The Pigmen have corrupted much.
Ok, on that much I can agree with you. If the housing & stock markets and overall economy continue to deteriorate, however, tomorrow may be a completely different story.
If Congress wishes to change GSE "eligibility" requirements to allow GSEs to purchase underwater and/or delinquent loans (to "socialize" losses), they have that power.
Repeating in general doesn't advance your side of a discussion. Repeating in a written forum doesn't ever.
But I'll take this on anyway. Let's just assume Congress acts as you say (I'd put the probability at
No siree bob, these jumbo mortgages are known in fixed income parlance as highly 'negatively convex'. People in these loans exercise their prepayment option in a ruthless manner. Therefore the cost of hedging them is higher than standard conforming products. I doubt the GSE's would aggressively add these to their own retained portfolio.
I felt this was a critical point and was basically being ignored or skimmed past, so I bolded it & repeated. My apologies if this violates blog ettiquette, but I don't have moderator rights here, and don't know how else to draw attention to something I thought was important to convey.
"People in these loans exercise their prepayment option in a ruthless manner."
That's it man. That's the point. Although I suspect in CA it may not be. And maybe that's another point. Prime bubble areas people who normally could not get Jumbo's DID. I gotta parse this in my brain...which hurts. But those not in high puffing (insert bong reference here) bubble areas just don't understand the stupidity of this market.
I will defer to dr. housing bubble for anyone interested in the conundrum.
double agh! what is going on? I can't seem to post. I'll keep it really short:
GSEs are private with shareholders who demand equity returns. No one they take on stupid credit risk, even if congress "allowed it."
They have really smart analysts who focus on minimizing their credit risk via repurchase demands, adjusting g fees and cutting off lenders who send garbage.
For the time being, the GSEs are living by OFHEO's rules on capital (haven't heard that we're throwing those out yet) and the reality is that they are having trouble just holding on to what they have on the portfolio now. Given how they account for their derivatives, it is almost certain that they will have to raise more capital after they print their Q4 numbers. Ceteris paribus this crowds something else out of the GSE portfolio or draws capital away from some other mortgage portfolio.
The GSE have dramatically scaled back the amount of IO/high LTV/Low FICO/etc higher risk loans they are doing as a result of the capital constaints (to say nothing of the way they have performed). The GSEs are not in a position to wave a magic wand and save the housing/mortgage market.
I was at a mortgage credit conference today and there was a very strong consensus that these jumbo lite loans would not be pooled with conforming loans. The best guess was that this move might cut the current jumbo/conforming spread in half.
Of course, the Paulson/Pelosi/Bonehead troika didn't stop to think about any of this, nor did they think about how they would sieze up the jumbo market while this plan works its way through Congress. When the market got wind of this, prices on jumbos hit the floor because no one wants to hold them knowing that jumbo holders will have a much stronger propensity to refi when this gets put into place. So if you want to know why jumbo rates jumped 50 BP yesterday, you can think our august leadership in Washington.
HARM, tj: They won't need to re-write the rules in the near-term. The pain will come later. God help the next president - and the taxpayer. Read my lips...
Sorry dude, but you don't know CA. I have a very dear friend who makes $65K who sold her condo in 2005, got $80K in payout and bought a $505K condo with a jumbo neg am for $425K. When the neg am reset she took out a toxic IO. She couldn't afford that either but the shiesters gave it to her.
She has 3 kids, divorced, and the eldest will be 18 in 16 months (meaning the child care money from hubby goes to 0 then).
She is not rich.
Actually, I'd qualify for a 730K loans so don't impute motives of envy without checking please.
Regarding your friend - what can I say.. except at $65K( total income ), with 3 kids I can't see how she will qualify for a $425K loan (its 6 times income for gawds sake) - jubprime or not.. so its moot. If she does qualify there there is other financial data that you aren't sharing with me but just presenting an emotive anecdote. I sympathise but people in CO ( and so many other states derisively referred to as flyover states ) should pay for this ?
Now that we've established our agreement that Congress has the power to re-jigger GSE requirements as they please, we can debate the probability of it happening.
If things don't get markedly worse, macroeconomy-wise: very low.
If the $hit really hits the fan: not out of the realm of possibility.
Of course, even eliminating standards and setting the GSE CLL @10 million won't save the housing market, though it could very significantly slow its decline (see Japan c. 1990-2006). But we're not talking about a rational reaction to mildly troublesome situation. We'd be talking about a freak-out reaction to a full blown panic.
There's enough bad stuff happening right now without getting hysterical about worst-case scenarios of government lunacy. Okay, I accept we are teetering on the brink of lunacy already, but the GSE bonds are not backed by the gov the way bank deposits are backed by the FDIC.
That said, it may well be that if the GSEs really were near collapse, the gov would feel compelled to bail them out, because they are so important to the housing market and the rest of the economy.
But we are not there yet. No matter what congress does, the GSEs are private companies (despite that G) that get to make their own decisions about what they do. Why would they act to bring on their own collapse, if it can be avoided? I'm still hoping that it can and will be avoided. I choose to get hysterical over the lunacy of the rebate checks.
Sadly, this feels like the Crossfire-ization of discourse.
The CEO and CFO of a publicly traded company are not going to knowingly take on terrible credit risk of upside down and/or no doc and/or pay option ARM loans. It will never happen.
To make it incredibly simple: if they refi'd out the garbage, shareholders would dump the shares, driving share price way below book value and making almost impossible to raise the additional capital they full well know they are going to need given the developing housing crisis. There isn't even a conspiracy theory that would make this plausible, much less likely.
If you want to worry about bailouts, focus on where the government and taxpayers have actual exposure: directly via the FDIC and indirectly via FFR, for starters.
Okay, I accept we are teetering on the brink of lunacy already,
Thank you. Raising the CLL to ~$750k in a state where the median income is around $55k (CA) is sheer madness.
but the GSE bonds are not backed by the gov the way bank deposits are backed by the FDIC.
This doesn't matter, because the "implicit" guarantee is already there (which is why GSE-backed securities considered so "safe" by investors and basically traded as if they were T-Bills). All Congress has to do is re-write the rules anytime they please to make it an explicit guarantee.
But we are not there yet.
Agreed.
Why would they act to bring on their own collapse, if it can be avoided?
Because a GSE is not a person, much less a rational one. It's simply a political & economic entity run by self-absorbed powerful rich guys, just like any other large company. If those guys at the top can be bought off and given a large enough golden parachute to pursuade them to "take one for the team", it could easily happen --especially if things get really dire.
I don't think we disagree about the current situation, we just disagree about the probability of a full-scale taxpayer socialization of bad debt.
Is this the basic idea on convexity and jumbos in pools?
Put jumbos in a pool, and bondholders get a smaller plate of mortgage pig pork chop than expected when the Fed puts a cleaver to rates? Therefore, bondholders demand higher rates to hold any bonds containing jumbos?
"except at $65K( total income ), with 3 kids I can't see how she will qualify for a $425K loan (its 6 times income for gawds sake)"
She did qualify. She has the loan.
"I sympathise but people in CO ( and so many other states derisively referred to as flyover states ) should pay for this ?"
NO! That's not what I'm saying. But you're earlier post linked all who had Jumbo's as rich. I was trying to point out that here in CA...that is not the case.
As to the envy thing, I apologize, it wasn't directed necessarily towards you. But just toward a general knee jerk that anyone getting these loans is rich. Which leads to a disgorgement of EFF! the rich.
Mom is currently 30 days behind on mortgage. has bad credit and a 30 yr fixed over 7%. She tried last yr to refi but due to credit couldn't. Now due to husb being on and off work in auto co she is 30 days behind and scared she could fall further. If rate was lowered by around 2% she would have good chance at being timely since this would save about $300 month which is a lot for her.
Question: Should she call risk mitg and ask to get rate lowered or would they want to see her more than 30 days late? What are her odds if she has bad credit?
HARM - to the contrary, this IS a conspiracy theory:
If those guys at the top can be bought off and given a large enough golden parachute to pursuade them to "take one for the team", it could easily happen
Do you have any idea how much legal liability would be involved for Mudd and Syron were they to do this? Are you familiar with SOX? With O&D fiduciary responsibilities to shareholders?
Your scenario is an absolute impossibility. And I think you fundamentally misunderstand the critique of the "implicit" guarantee, which is that Freddie and Fannie might turn out to be terrible risk managers and therefore fail or turn out to be dramatically undercapitalized. It's not that they'd knowingly destroy themselves to "take one for the team."
What team? Do you think Mudd and Syron work for Bush? Bernanke? Pelosi? Paulson?
They work for private companies. The odds of Freddie and Fannie refiing out underwater loans are precisely the same for, e.g., as XOM doing it. Zero, despite both companies being very "political" entities, reliant on on the USG to keep their "COGS," for lack of a better term, down.
I don't understand how futzing with the conforming limit is going to fundamentally solve anything. This is not a liquidity problem but an asset-price problem. While raising the limit may allow loans to be off-loaded, how is it going to help those who are screwed by the current price of their asset?
If you're a politician, it may solve all your problems for the next several years if it makes you look like the good guy a few months from now.
What else matters? Peoples' welfare?
That's like saying a hedge fund manager cares about his clients' wealth.
The system is simply not designed for that to happen.
What matters is that you can convincingly appear to be that way for a long enough period of time to get yourself "in the money".
Politicians will start to look out for the welfare of their voters only when the voters are smart enough to hold them accountable for their welfare. And no sooner.
"Put jumbos in a pool, and bondholders get a smaller plate of mortgage pig pork chop than expected when the Fed puts a cleaver to rates? Therefore, bondholders demand higher rates to hold any bonds containing jumbos?"
No not really. I've had now too many martinis to go there.
Well, the GSEs are officially corporations, but most people think they're wereagencies. It's rumored that when the moon is completely dark or they are mortally injured that they will shapeshift into an arm of the government immune to market forces and with access to the strength of unlimited capital. Just a rumor, never been seen, but a lot of people are counting on it.
"Jan. 25 (Bloomberg) -- Goldman Sachs Group Inc., Citigroup Inc., JPMorgan Chase & Co. and 23 more underwriters of Countrywide Financial Corp. were sued by three New York agencies for allegedly helping the home lender defraud investors.
New York's city and state comptrollers and their pension funds added the securities firms, two accounting firms and Countrywide officers and directors as defendants in a federal securities-fraud lawsuit filed last August.
The underwriters and accountants enabled Countrywide to release false statements. Investors lost millions and New Yorkers lost their homes,'' New York State Comptroller Thomas DiNapoli said in a statement.We need to recover the pension fund's losses and find a way to help all those families.'' Countrywide's Underwriters Sued for Fraud by New York (Update2) - Bloomberg.com
She qualified for a IO and a negAM 425K - she wont' qualify for a conforming full 417 K will she ? (its 6 times salary with 3 kids for gawds sake !) - else why didn't she just get one and do a top-up second ? or do one now ? her LTV 425/505 looks good, looks alright.
NO! That's not what I'm saying. But you're earlier post linked all who had Jumbo's as rich. I was trying to point out that here in CA...that is not the case.
Actually I didn't say jumbos I disputed that anybody who qualifies for a 735$ loan is middle income, i.e that if they qualify for a 735K loan they are rich( the other rich or the same one too for that matter ).
I know my median income, mean income, poverty level figures - obviously 65K isn't rich - with 3 kids even less so; but with 65K you ought to restrict yourself to and to qualify in a conforming loans world for 200K or so.. so if she went for a GSE loan it would be for wayy less than 417K so she ought to get it and quite rightly too - that IS the charter of the GSE ( cf my earlier post ).
What the heck is she doing with a loan of 425K ?
As to the envy thing, I apologize, it wasn't directed necessarily towards you.
No worries man. We are all adults here - and gone tomorrow ( lol .
The TBA market makes "average" assumptions about prepayment because (heretofore) the conforming limits functioned to keep these pools "granular." The traders are saying that they're not willing to price TBA trades the same way if they suddenly have these jumbos tossed in with very different prepayment behavior.
Tanta | Homepage | 01.25.08 - 6:42 pm | #
I would think that prior pre-payment assumptions would be unreliable considering the run up in home price appreciation. I defer to the expert but that seems a little like relying on the models and embedded assumptions that got us into this mess in the first place
misean- unfortunately, this is going to dominate the headlines for quite sometime it seems.
more also on potential hedge trouble from the wsj-
"
Much of the nervousness Friday surrounded hedge funds, and whether a large fund was unloading stocks amid big losses. One area of concern surrounds so-called quantitative funds, which base their trading on computer models and saw deep losses when stocks fell in August.
Losses are hitting those using a strategy known as price momentum, a bet that winning stocks will continue rising and losing stocks will keep falling.
Hurting these funds lately were unexpected tumbles in stocks that momentum players favored, including Apple, Google and a group of alternative energy stocks such as Sunpower.
Stocks the quants expected to continue falling, meanwhile, suddenly jumped higher, including bond insurers Ambac Financial and MBIA, as well as home builders such as Ryland Group." Rally in Stocks Fades on Rumors On Hedge Funds - WSJ.com
Going back to last summer, my bearish strategy has been based on a simple idea. I felt some P/E ratios were too high and we would go through a stretch of deep earnings contraction. So, if you could identify sectors with the highest P/Es and deepest contraction, you could win bearish.
So far, it's worked pretty well, except I didn't forssee the implosion in financial P/Es and missed SKF.
Just to get an update and fresh perspective, I revisited ProShares site today to check P/Es. Here they some for double short ETFs.
Russell 2000 TWM 40.82
Nasdaq QQQQ PSQ 34.38
Japan EWV 31.36
China FXP 24.51
RE SRS 21.31
Semiconductor SSG 21.00
Tech REW 20.21
S&P SDS 18.51
Health care RXD 17.73
Emerging markets EEV 17.02
Financials SKF 13.32
I then ranked sectors where I think earnings are most vulnerable over the next 6-12 months, and here's my picks.
Russell 2000
Emerging markets
Semiconductor/Tech/NASD
Japan/China
So, I confirmed to myself that the best possible double short pick is still TWM (Russell 2000). SRS is still a good volatility trading play, and EEV, FXP, and EWP are still probably worth a shot.
I've never felt totally great about shorting tech, because I tell myself that I don't want to go against Microsoft, and today I'm glad I didn't. But tech/NASD looks weak now, too, especially semis.
I think health care (RXD) is a special situation and maybe an attractive short due to near-term political situation and typical Wall Street overreaction. Don't bet the ranch on it.
I might add that "david_in_ct" was defending "market neutral" startegies and reports suggest that these morons weren't quite as "neutral" as they thought and were actually, "neutered".
you know, there is all this talk about, "let em fail", they @##$%ed up and this is what they deserve.
I am really mixed here in emotion, especially when it relates to the monolines, the implications of a failure I'm afraid would be much to widespread in a system which is attempting to recover.
I think that some here actually wish for failure without thinking through the potential implications-
Yep,these kinda stories are gonna play out over and over and over in the next few years. A young guy at work probably makes 50-55k...talked into a 390k house. He is one of a couple I know of for sure.
The only thing i accomplished this run up was talking my brothers friend out of a IO loan. Convinced him 80-20% down was the only way to fly...
Yeah it's gonna kill a lot of us...Our friends and family who don't get it are gonna burn. The question is How do we help them? I dunno, but I want to, and yet can't afford to.
It breaks my heart...and I don't know what to do...
I try but I don't want to kill myself to do it.
Maybe I should sacrafice myself for them....I don't know. Because I would.
"DAVOS, Switzerland The chief executive of Moodys, the credit rating agency, conceded on Friday that his agency had made significant mistakes in the rating of structured finance products, but added that the agency had been deceived by people who put together the products."
"I am really mixed here in emotion, especially when it relates to the monolines, the implications of a failure I'm afraid would be much to widespread in a system which is attempting to recover."
risk capital,
misean posted this list last nite. I ran it by a relative who has been in forensic accounting his whole life. His response...Pretty accurate.
I mentioned this before,the numbers are so large that if even 1% faced capital/margin calls a whole shitload of companies will cease to exist...This shitty paper is EVERYWHERE. And before yesterday I was a "Burn'em all down and pick the ashes up".
Chris
Thanks misean!
Loose AAA, CDO type sewage looses AAA
Pensions have bought this garbage.
ERISA and other laws dictate the ratings of the stuff Pensions can own.
Triggers a forced sale of the toxic garbage.
Insurance co's have the same proble as pensions to some extent on this stuff.
Insurers can use independent ratings of S&P to value the CDO crap bonds... and other raters...BUT if S&P and others did not rate or downgrade tough poop.
This means that we will have a mark to market of this crap.
New FASB rules say you can't keep bundled tier3 stuff at mark to fantasy if a know mark to market price is revealed.
Drop ratings on monolines enough and we have a real proble.
That's a snap shot...It's not a thesis. There are simplifications here.
The rest of you please respect this...I and cobra will post on tis as is possibble, no release of confidential info...but let the email go...i won't respond to much but cobra....
I hate doing this but send me the data cobra...if you can.
I am really lucky that nobody in my family bought a house or overextended themselves during this run up.
Heck the only thing that saved me was living in Socal during the 80'/90-'s. I saw the run up and crushing drop. I looked for property when I got to Fl and thought "How do people afford this?".
More people I work with seem to be heading to our point of view...
Im friggn new here and have not strapped on my laser to my shark head, buy, here goes:
"increased interest-rate risk" (why)?
"The loans will taint the bonds" (what bonds, are you speaking in terms of underwriter packages, like the packages available at Disneyland for families)?
"Higher mortgage rates would make it even harder to unload". Unload where? Any specifics there bub?
SIFMA ...oh, gotcha....yah, say no more there; my laser just snapped into place and its focused on issues 1 through 3.
"listen to the SIFMA meeting by phone"....gotcha, he was busy and has a cell phone and a laser on his friggn head
"Ginnie Mae created new "specified" pools outside of their TBA issues for FHA ": Yah, SIFMA also enjoys pension funds and they are a threat to world stability, but whats your friggn point?
7."Street is on high alert": Yah, me too!
"Spoil the fungibility of the collateral": What friggn collateral are you referring to, that has been the problem with these pirates and the main reason that we have a problem; your entire story up to this point should focus your friggn laser on the fact that SIFMA needs more loan units to trade, and they really dont give a FUC_ about collateral reality or specific verification of underlying evidence to support anything that relates to the reality of normal mortgage or credit relationships, they just want more derivatives to increase market share; mortgages and pensions are cashcows they want to friggn milk until the udders have friggn friction burns and then explode and burn the friggn barn down! These insane eveil people at SIFMA want to underwrite the collapse of America and take derivative bets on who will pick up the pieces after this retarded bunch of idiots in charge phase out of control!
*Loans Formerly Known as Jumbo": Yah, we have a Jumbo problem with SIFMA forcing The Fed to cut rates at will when ever they dont have the proper hedge in place to profit from. We need to crush SIFMA and destroy these lobbies before they morph into the next Nazi experience in America. Im not friggn kidding!
The American Securitization Forum wrote the rate freeze presented to the public by the President and the Treasury Secretary.
It can be found it at americansecuritization.com
The framework allows servicers to modify loans without borrower signatures.
Source: American Securitization Forum, Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans, Executive Summary, December 6, 2007, page 13, third paragraph from bottom of page
Counseling and modification expenses are to be charged to securitized trust cash flows, so service providers, like Countrywide, which has a representative on the board of the American Securitization Forum, will profit from the process.
Source: American Securitization Forum, Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans, Executive Summary, December 6, 2007, page 7, first full paragraph
Appraised value for modifications are based on the date of origination, even if the current value is much less.
Source: American Securitization Forum, Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans, Executive Summary, December 6, 2007, page 2, second bullet
According to the American Securitization Forum's Framework for the rate freeze, borrowers will not have to document current income to be eligible for refinancing, even if they received initial loans with embellished incomes
Source: American Securitization Forum, Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans, Executive Summary, December 6, 2007, page 3, FICO test
ERISA and other laws dictate the ratings of the stuff Pensions can own.
Triggers a forced sale of the toxic garbage.
Insurance co's have the same proble as pensions to some extent on this stuff.
Insurers can use independent ratings of S&P to value the CDO crap bonds... and other raters...BUT if S&P and others did not rate or downgrade tough poop.
This means that we will have a mark to market of this crap.
New FASB rules say you can't keep bundled tier3 stuff at mark to fantasy if a know mark to market price is revealed.
Drop ratings on monolines enough and we have a real proble.
That's a snap shot...It's not a thesis. There are simplifications here.
If you need more guidance ring me in the morn..cuz I've had too many martinis and am out of the game. I'll leave you with this to understand:
Some commenters have implied that the banks need to be willing to fund mortgages going forward. I suggest that the banks dont provide money, theyre usually just a middleman for investors.
Who are (were) the major investors? Look at the balance of payments. In the last 7 years about $4.2T have gone overseas; the current rate is about $0.8T per year.
Foreign holders of dollars need to invest them somewhere, and over the last several years, many of them have gone into the US mortgage market. Returns there were superior to treasuries, especially in the early part of the decade, but considered safe. They also believed that real estate only goes up.
CR has observed the correlation between the trade deficit and MEW; with no hard evidence of causality. I posit that to some extent the trade deficit caused MEW growth through easily available credit provided by foreign dollars.
Now that theyve been burned there theyll be looking at alternative dollar investments. The pool of mortgage money will shrink and the next bubble will start developing. Maybe weve already seen its naissance as SWFs are investing in US corporates and banks.
Ok, you guys who mentioned 1% to 5% unwindings, and disaster therefrom.
I remember reading that stuff like that was happening before the great depression I, but I guess that once you get past the first leveraging, I don't understand it anymore. Also, I'm sure that what I don't understand about leveraging has gotten more complicated than GD I machinations.
This is something that I don't understand precisely, and yet I feel is a problem bigger than any other mentioned. Exactly what does this mean? Is that conjure's global financial meltdown? And what would a global financial meltdown mean? All money at all banks gone to zero, or as close thereto as makes no diff?
.S. Rep. Paul E. Kanjorski is calling for an examination of the bond industry to determine the impact the recent market volatility will have on local municipalities.
Kanjorski, D-Nanticoke, Friday said he will convene the House Services Capital Markets, Insurance, and Government Sponsored Enterprises Committee, which he chairs, to gather data and seek remedies.
Kanjorski said he wants to know if there is a need for regulatory reforms in the bond industry and the extent recent downgrades of bond insurers ratings will have on future municipal projects.
The current market volatility has proven unfortunate for many, Kanjorski said in a press release. The recent bond insurer ratings downgrades, and the possibility of more on the horizon, could have ricochet effects on the financial marketplace and municipal governments, including many in Northeastern Pennsylvania.
Isn't the risk of these higher loans already priced into the conforming adds for high LTV and low credit score? That's where the majority of these are going to fall simply because of the falling home prices in California.
FHA is the entity that doesn't have any additional risk priced into their expanded standards.
At least two GOP senators have expressed opposition to the proposed yearlong increase in conforming loans limits, arguing that the government should first establish a new regulator with the power to reduce the $1.5 trillion mortgage holdings of Fannie Mae and Freddie Mac.
The report stated that world construction spending grew by just three per cent in 2007, to reach $4.7 trillion, compared to almost five per cent growth in 2006.
"Five years, nearly 4,000 deaths, 35,000 wounded Americans and half-a-trillion dollars later, the mission is still not accomplished," he said.
Appearing with Reid Friday, House speaker Nancy Pelosi also piled on Bush.
"The president has his head in the sand on this war that is for him a war without end, no end in sight," she said.
One thing Bush and Pelosi agreed on was that they had worked together well to put together this week's economic stimulus deal, and that Congress needs to pass it right away.
According to one estimate, $6 trillion in new mortgages were issued between 2005 and mid-2007. Of those, one analyst believes $380 billion will go into default. After liquidation of assets, final losses to cities, counties, pension funds, insurance companies and investors may exceed $150 billion.
Securities dealers are forecasting an increased issuance of treasuries early in the year due to a spike in the federal deficit, according to a survey released by the Securities Industry and Financial Markets Association.
Treasury bill, note and bond issuance is expected to climb to $125 billion during the first quarter of this year, a jump from the $34 billion issued in the recent fourth quarter and $80 million during the first quarter of 2007, the securities dealers surveyed by the New York-based organization said.
SIFMA officials also expect the 2008 federal deficit to escalate to $228 billion from the $162.8 billion in 2007.
"The current credit crisis has evolved from the unregulated global growth of structured finance with the pricing of risk distorted by complex hedging which can fail under conditions of distress. The proliferation of new market participants such as hedge funds operating with high leverage on complex trading strategies has exacerbated volatility that changes market behavior and masked heightened risk levels in recent years. The hedging against risk for individual market participants has actually increased an accumulative effect on systemic risk."
Nothing new to regulars of this site, but a useful summary nonetheless.
Until Misean sobers up or other finance heavy hitters are online, let me try: the risk is not so much as all the money goes away as all the money goes nowhere - metaphorically, money is the grease for the engine of the real economy - if the velocity of money in the economy drops to zero, we get the same thing as the car engine running without any oil...which I believe the knowledgeable car folks describe as 'bad.'
Of course, plenty of money is also going away (well debt really but fungible or money equivalent).
mike morgan
Bank inventory Ive written about this a little. Were seeing this problem start to pus up. I figure it will take about another 8-12 months before it pops. Basically, the banks have no clue what to do with the properties they are foreclosing on and the properties where buyers have stopped paying their mortgage. There are some extreme examples, but were seeing the same basic problems nationwide
It will also be an investment opportunity for a large fund to step in, providing they have their ducks in a row before approaching the banks
this should be made illegal, or only if it's for rental only...
If you're referring to Conjure's predictions about the possibility of a liquidity trap, Conjure and I talked about a nascent liquidity trap here over six months ago.
Now, Stiglitz is talking about a possible liquidity trap. If that's a cult, then count me in.
I expect one day the market will fall 1500 points, ex-homeowners will be rioting and burning down their old neighborhoods in SoCal, The presidential frontrunners will drop out of the race and people will be logging on to ask..."what does the clock say? Is it 58 or 59 seconds now?
The accord was announced by Speaker Nancy Pelosi of California, Representative John A. Boehner of Ohio, the House Republican leader, and Treasury Secretary Henry M. Paulson Jr. at a Capitol news conference and hailed minutes afterward by President Bush as the fruit of patience, determination and good will in both parties.
Re: Ms. Pelosi said the package was aimed at the middle class
I think she meant to say the middle class of underwriters will reap a windfall from my sellout to The American Citizens that have no clue what Im doing with The SIMFA Lobbyists!
Speed, we need more friggn speed, can someone please get Paulson some more coke or meth and whack him with a giant dose of SIFMA Kickbacks & daytrader monopoly money (and a get out of jail card)!!
he Securities Industry and Financial Markets Association (SIFMA) today applauded the New Democrat Coalition for supporting legislation to remedy the current visa shortage that has impeded America's ability to remain competitive in the global market.
In a letter addressed to House Speaker Pelosi (D-CA) and Majority Leader Hoyer (D-MD), and signed by 16 members of Congress, the Coalition urged House leadership to "take action this year to resolve the immediate talent crisis that is facing U.S. employers." The letter further stated, our outdated visa programs for the most highly skilled workers from abroad are hopelessly out of line with the needs of the U.S. economy."
Congratulating the Coalitions efforts, Marc Lackritz, SIFMA president and CEO, stated, We believe a bi-partisan solution will strengthen U.S. economic competitiveness, cement the U.S.
See Also:
House Minority Leader Nancy Pelosi (D-Calif.) took the House floor last night to demand an investigation into the Foley matter. But Boehner headed her off, calling on the House to refer the matter to the ethics committee, which the House promptly voted unanimously to do.
The news of Foley's resignation overshadowed an afternoon Republican ceremony hailing a military commissions bill, and it gave Democrats sudden hopes of winning the Palm Beach-based 16th District. Many lawmakers think Democrats are on the verge of winning control of the House in November, and an unexpected gain could prove crucial.
I didnt realize there was this whole low convexity problem with jumbos. Still it seems that Tanta provided the solution in the opening: separate pools.
Price Stout: good arguments. Youve convinced me that raising CLLs for GSEs wont be an immediate threat to the taxpayer. I still dont like the idea, though, and certainly not the limit proposed ($725k), because I dont think its necessary.
I also had a good laugh with the less than sign fiasco since it bit me about two days ago.
ray, Dumbos was priceless.
Misean, I understand what youre saying about jumbos, having lived in CA for decades, but Id rather see prices fall than CLLs raised. Id also rather see mortgage interest deductions limits lowered, too.
risk capital, I dont think the NY case against Countrywides co-conspirators will get very far in view of the recent Supreme Court case involving Charter Communications and the denial of hearing in the last Enron case. The current court is inclined to shield from liability those who facilitated the fraud and leave liability only with the principals.
Does anyone else here think CR has become too successful? It takes forever to read and try to understand all that is writte
What about mortage substitutions in these GSE pools and trusts, any thought there??
Re: No Purchased
Loan permits the release or substitution of collateral if such release or
substitution (i) would create a "significant modification" of such Purchased
Loan within the meaning of Treas. Reg. ss. 1.1001 3 or (ii) would cause such
Purchased Loan not to be a "qualified mortgage" within the meaning of Section
860G(a)(3) of the Code (without regard to clause (A)(i) or (A)(ii) thereof).
Re: (vi) UCC Financing Statements for filing in each of the UCC Filing
Jurisdictions described on Exhibit XIII hereto, each naming Seller as "Debtor"
and Buyer as "Secured Party" and describing as "Collateral" all of the items set
forth in the definition of Collateral and Purchased Items in this Agreement,
together with any other documents necessary or requested by Buyer to perfect the
security interests granted by Seller in favor of Buyer under this Agreement or
any other Transaction Document;
(vii) any documents relating to any Hedging Transactions;
(viii) an opinion or opinions of outside counsel to Seller, substantially in
the form of Exhibit XIV;
xcept that the REMIC may exchange a
defective loan for a ``qualified replacement mortgage'' for up to two
years.
Section 1.860G-2(b)(1) of the Income tax regulations (the
regulations) provides that, subject to certain exceptions described in
Sec. 1.860G-2(b)(3), if an obligation is significantly modified, then
the modified obligation is treated as one that was newly issued in
exchange for the unmodified obligation that it replaced.
I haven't read all the 245 comments above (yet) so please forgive me if this is a repetition.
Those who worked out the present terms for raising loan limits must have had an uneasy feeling that some of the 'advantages' would prove illusory. I suppose OFHEO anticipated this specific difficulty quickly enough, but how nice of SIMFA to deliver the cold dose of reality. Or did Mr. Lockhart comment the same already?
For an alternative LFKAJ (which I like), maybe 'pernicious pachyderm'. You could shorten it to an acronym, but I wouldn't want responsibility for the result.
From a second farewell tour, I remain yours, etc.,
I think the politicians and the Fed are finally starting to understand that our ponzi-scheme hollowed out shell of an economy collapses as the housing market implodes. Pretty sad, that a 10% drop in house prices can wipe the economy out.
All the levers in our economy are connected to house prices spiraling to the moon. Pretty stable system, dontcha think?
So, dubya and Paulson, in their trembling lying voices, may say the economy is strong. Some would point out that it's best not to listen to what they say but pay attention to what they do. Massive programs to salvage the economy LOL!
Why has Ben been slashing rates so furiously? Has it helped?
It's a good thing we still have a military. We're going to need it, here, to maintain order.
Isn't the risk of these higher loans already priced into the conforming adds for high LTV and low credit score?
That's (an attempt to) price the credit risk.
The thing is, a very high-FICO low-LTV jumbo will, all other things being equal, exhibit very fast prepayment speeds in even modest periods of rate declines. And actually, the more you load it up front with add-ons, the higher its rate relative to current market, therefore the more likely it will want to refi at earliest opportunity. (See the old "2/28" logic for an extreme example of the same phenomenon.)
The fact is those LLPAs are fairly modest adjustments. That is so because there isn't supposed to be such a wide range of credit quality that huge adjustments would be necessary. But the end of it is that this additional yield goes to the GSE, which is guaranteeing the credit losses, not to the end investor, who doesn't have any credit risk in a GSE pool. The end investor cares about default only to the extent that it's a prepayment to the investor (no different from a refi--the investor always gets 100% of outstanding principal back and the GSE eats the difference).
So basically, high-quality jumbos just don't default and create credit losses very often. They just refinance out of your pool and 1) therefore lower your yield while 2) leaving the remaining pool with seriously lowered average credit quality. That second problem is certainly exacerbated if you have a handful of very large (fast prepaying) jumbos in with a bunch of average-sized conforming loans (around $230K). The handful of jumbos that are prepaying could be half of your pool, by balance. And in a pass-through pool, you earn your coupon on the outstanding balance. You don't get some guaranteed yield.
At the level we're talking here, we're pricing pools, not individual loans. So you have to use some sort of model to project prepayments, unless you want to pay too much for the security, which nobody exactly does.
I know some people have a hard time analytically separating credit risk and interest rate risk, but that is how mortgages are priced.
This is all very different from pricing those weirdo Alt-A and subprime RMBS and ABS. Those aren't priced "TBA."
GSE loans are, exactly, the "commodities" of the mortgage market. That's the beauty of the GSE business model: it spits out cookie-cutter loans, that can be modeled acceptably for prepayment risk, and that therefore bond buyers are willing to trade TBA. Remember that they're guaranteed: that's what the GSEs do. So the buyer isn't buying credit risk. The buyer is buying interest rate risk (or trying not to).
Tanta So basically, high-quality jumbos just don't default and create credit losses very often. They just refinance out of your pool and 1) therefore lower your yield while 2) leaving the remaining pool with seriously lowered average credit quality.
Amen to that. This is such a different line of business that new models will need to be developed. Since, in particular, Fannie didn't show a great performance in risk-modeling its "innovative" products introduced to keep market share, it's not that clear that it has the expertise to do this.
If you pool just jumbos, you'll need to get into a lot of them, and you'll need different models, and the traders are going to have to go along.
But I'm with Tanta. How would GSE-backed jumbo pools be all that much differently priced than the stuff already out there? They are going to be geographically segregated, just as they are now, so you get the higher area risk. The only way they can be priced much lower than current jumbos is if essentially GSE's accept higher credit risk at a lower rate than other entities would, and in that case it does threaten the future of the GSE's.
Even from the point of view of portfolio lending, you would group jumbos in a different class for projecting both rate risk and credit risk. The additional credit risk comes because there is a higher sorting effect if rates drop, which is why Thornburg offered refis on a dime to try to prevent that from occurring.
Even in the current environment, Fannie has gone to streamlined financing to try to deal with the refi sorting issue.
The thing is, GSE pooling is designed to work with a relatively stable market, and jumbos just aren't as stable. You need to react more quickly on pricing and rate risk.
If I interpret mp's references correctly, the meltdown more specifically is an interlocking cascade of counterparty failure in the OTC derivatives market.
The numbers for outstanding contracts are staggering, in the double or triple digit trillions depending on the market discussed. IF everyone pays as contracted then net exposures are much, much lower (but still big numbers). However, if one counterparty comes up short, then the other party suddenly has an unhedged exposure, and quite possibly short the cash to meet their obligatoin...rinse and repeat. This would be the point at which the deleveraging underway becomes 'disorderly.'
The liquidity trap is a different concept, viz: Liquidity trap
In monetary economics, a liquidity trap occurs when the economy is stagnant, the nominal interest rate is close or equal to zero, and the monetary authority is unable to stimulate the economy with traditional monetary policy tools. In this kind of situation, people do not expect high returns on physical or financial investments, so they keep assets in short-term cash bank accounts or hoards rather than making long-term investments. This makes the recession even more severe, and can contribute to deflation.
The thing is, GSE pooling is designed to work with a relatively stable market, and jumbos just aren't as stable.
I think I'd phrase that differently.
GSE pooling is designed to create a relatively stable market. The more it works the more it works.
There is a price to be paid for that stability: no outliers allowed. FICOs just too low? Then it's subprime, and relegated to the "unstable" suprime market. Balance too big? Then it's jumbo and relegated to the "unstable" jumbo market. Documentation too goofy? Then it's "Alt-A" and relegated to the "unstable" Alt-A market. And so on.
What underlies this plan to raise the conforming limits is, I think, just another variation on the old desire for a free lunch. Of course the GSEs exist--it says so right in their charters--to "stabilize" the mortgage market. They accomplish that by stabilizing only that segment of the market that can be stabilized. They do not possess any magic spoofy-dust they can sprinkle on bubbly jumbo markets that makes them manageable.
This is what Lockhart is saying: if you want the GSEs to "tame" the jumbo market, then you have to let them tame it. Meaning, you have to let them "commodify" these loans. (Make them "jumbo lite," as Brian says.)
The trouble you run into here is that, absent a bubble market, jumbos are "boutique" business, not commodity business. The only reason we care right now about jumbo market liquidity and pricing is because there is (apparently) a "commodity jumbo" market in disarray. Well, ding dong. It's in disarray because it's a contradiction in terms. What's an "average above average loan" when it's at home?
The answer seems to be that a "jumbo jumbo" is one that the borrower can actually afford, and an "average jumbo" is one the borrower can't, actually, afford without some subsidy from non-jumbo borrowers.
Is anyone else old enough to remember the old old Saturday Night Live skit with the CHEESEBURGER-PEPSI-CHIPS! restaurant? That's what this reminds me of.
god, you guys are no help at all. hey! let's make obscure old people references and then ignore bacon dreamz! i'm going to play with my new beach-ball. harumph.
Thanks for your explanation to my question. You're right that I wasn't thinking about that risk.
Let me follow up with how have limit increases been priced in the past. If I recall correctly, the last conforming increase capped loans at $417,000 from $366,000. Was there additional interest rate risk then? If so, how was that passed on to the consumer?
I know the limit being proposed now is some 200k higher than the existing limit, but there should be some lessons from the past that can be applied today.
It is a classic liquidity trap. The market b-slapped Bernanke into place in less then 24 hours. The smart money is gone, as soon as the few greedy nimrods left get fleeced there will be no money to be had at all.
Hopefully the system is forced to reset before any of these idiotic entitlement schemes for ho'moaners go into effect.
Why do we need to raise loan limits to $730K from $308K in 2003 more than 100% in 5 years if inflation has been held in check at 2%/yr?
Somehow this doesn't seem to reconcile. Housing is the single biggest expense for US consumers. I wonder if this raises questions about our government's inflation readings.
funny, after reading 100 of the comments and not seeing the question i wanted to ask, i jumped to the bottom of all 250+ comments to ask it - and lo and behold - you just did -
so tanta, when the conforming limit was increased to $417k, was there an concomitant increase in rate/risk then as well? if i remember spreads had been collapsing no?
Let me follow up with how have limit increases been priced in the past. If I recall correctly, the last conforming increase capped loans at $417,000 from $366,000. Was there additional interest rate risk then? If so, how was that passed on to the consumer?
Well, you know, the increase you're talking about was 2005. That was rather unusual, historically speaking. Here's the historical table:
Remember that the formula that changes these limits is basically just applying the annual change in national average home prices. So the average price goes up, the conforming limit goes up.
The reason it hasn't increased for this year is that the average went down (but there is no explicit provision in the law to reduce the limit, only to increase it).
That is why it does, actually, take Congressional action to raise the limit above the formula results. Because the provision for using that formula is a matter of federal statute.
By definition the current proposal is to increase the limit well over the national average sales price, not to "keep up" with it. As it is, the $417K limit is now rather higher than it "should be." As prices drop it would eventually get more out of whack even if you left it at $417K. Upping it to $700K in one swell foop has enormous impacts.
so tanta, when the conforming limit was increased to $417k, was there an concomitant increase in rate/risk then as well? if i remember spreads had been collapsing no?
Again, to clarify: prepayment behavior changes with the rate cycle. Obviously. Take a homogeneous pool of loans, project out a rate cycle (up or down), get a prepayment prediction, price it.
Take a non-homogeneous pool of loans, project out a rate cycle, get a whacky prepayment prediction.
There is nothing magic about the level of the conforming limit as long as it is based on this "averaging" thingy. When rates drop by very large increments, everybody refis.
When rates drop by smaller increments, the bigger loans refi. The smaller loans will frequently just sit there, because a .125 drop in the rate doesn't generate enough dollars per month to matter on the smaller loans. And yes, the question of how meaningful those dollars are is a matter of incomes and inflation and so on. And the conforming limit is just supposed to be keeping up with inflation, more or less (home price inflation, not general inflation, but sans bubble the two aren't supposed to be that out of alignment).
We've had lots of questioning of why these special accommodations should be made for California when the flyover states aren't affected by this mess...
Just reminding everyone that CA makes up something like 17% of the country's GDP and if there is a meltdown here it's going to cause the deepest recession, if not depression, we've seen in our lifetimes.
In California, we have two senators, just like Montana, a state that has 1/50th of the people. That lack of proper representation has manifested itself in fiscal and policy imbalances.
Over the last decade, California has paid hundreds of billions more in taxes than it has received in services from the federal government. That surplus turns into subsidies for many of the "flyover" states.
The math on this thing at pool level is pretty complex, which is why I keep avoiding getting into it. But you can get a handle on the issue here just by asking yourself:
Would you refi to save $20 a month?
Would you refi to save $200 a month?
This is not just a matter of the new interest rate. It's a matter of how big your loan is. I can remember being totally blown away when I first encountered auto loan refis. (My credit union sent out some solicitation.) Sure, I could have reduced my rate by quite a bit, but given the low balance of my car loan, it still wouldn't have saved me much compared to fees & hassle. I'd have reacted differently if I had a much newer car loan with a much bigger balance.
We are talking specifically about TBA pricing. TBA means you are not looking at a pool of specific loans. You are agreeing to a forward trade where you will buy a pool backed by loans not yet originated. You do this because you have a promise that they will, um, "conform" to the established rules.
So it's not that TBA trades would just end if we re-defined "conforming" today. But there would be new rules, therefore new prepayment expectations. The problem is that the new expectation would have to be that you risk getting a very "lumpy" pool. You might therefore require a different spread than you would have on the old granular pools.
They'd have to be "lumpy." By definition. The proposal is, basically, to move the boundaries out to include more of the "tails" at the high end of a distribution curve. The only way that this won't result in "lumps" is if it does, in fact, reflate the housing bubble and drive the median or mean price back up.
jmay, I beg to differ. There is no reason the rest of the nation has to support artificially inflated CA house prices. You need to embrace house price deflation.
As a CA renter, I 100% accept and embrace California house price deflation.
However, in my short time of being out here for 3 years I know there are plenty of greedy whatever-somethings who will fight, complain, bitch, and moan about their house losing money.
When it happens, it won't be pretty. I don't know how it can't happen either.
Tanta - yes, I think using the word "uniform" instead of "stable" would be better. But the performance over time for jumbo loans is not stable. They move on different curves than conformings.
The way especially Fannie has operated is that it is in a well-spread, high demand segment for most of its conforming pools. It has a lot of data to work with, and so does everyone else for this segment.
By definition, adding a hunk that will be much more segmented in geographic distribution alone messes up the models, not to mention the refi issue.
I think the refi issue is huge. Jumbos mortgages act more like jumbo CDs - they are hot money that moves quickly on small rate changes. The way you project them out, whether on portfolio or pool, is different.
Thank you for all your hard work trying to explain the real issues, Tanta. It's not that I oppose people getting the best rates that the market can give them - it's just that I think a problem relating to a failure to assess risk cannot be addressed by continuing to ignore risk.
Mortgage rates are highly affected by future expectations. The reason why jumbo rates are high now has to do with future expectations of lower rates and quicker payouts for those who can qualify, plus rapid loss of credit/collateral quality on the remaining pool. In that way, jumbo pools might well end up with an ugly residual after a few years that is acting more like subprime than prime.
Since, in particular, Fannie didn't show a great performance in risk-modeling its "innovative" products introduced to keep market share, it's not that clear that it has the expertise to do this.
In fairness to Fannie, pretty much no one showed any ability to risk-model the "innovative" products. Not the rating agencies, not the large originators and not the end investors.
It's awfully hard to model when you have no historical performance data and meanwhile HPA is 10+%/yr. The modelers basically said "beats me." The models continued to model on the "normal" characteristics b/c many of the "innovative" ones weren't even variables in the model (great, and true, example: S&P LEVELs model treated an 80% first with 20% down payment the same as an 80 w/ 20 piggyback for many months. This is why even the Moody's CEO has acknowledged they didn't do a very good job.) Home prices kept sky rocketing and so the "production" guys put their foot on the gas.
When the models produced garbage answers because they weren't calibrated based on any kind of relevant data set, that's when actual PEOPLE are supposed to step in with their actual HUMAN JUDGMENT and override the modeled answer. Sadly, most of those actual people with actual judgment are "too old" or "too expensive" or "too pessimistic" or "not entrepreneurial enough" and have been replaced almost everywhere with 28-yr old MBAs who don't know anything.
Wow, that was mostly off topic! Sorry.
The answer seems to be that a "jumbo jumbo" is one that the borrower can actually afford, and an "average jumbo" is one the borrower can't, actually, afford without some subsidy from non-jumbo borrowers.
now this is why I love this site. you say in 30 words what I would fail to say in 500, and you're funny to boot. Except that I still think you're point is a bit of form over substance, since the substance will be that the "average jumbo" in your parlance will not in reality be GSE eligible.
It's too nice a day out, so I'm off to play in the sun!
Except that I still think you're point is a bit of form over substance, since the substance will be that the "average jumbo" in your parlance will not in reality be GSE eligible.
I pretty much agree with you there. (I don't entirely rule out the possibility of some idiot coming up with a "Flex Jumbo.")
But that's why this bugs me so much. The borrowers who (arguably) "need" a 30-year fixed refi at 5.5% won't get it. The borrowers who could probably be counted on to spend the monthly cost savings out of a LFKAJ refi on stuff--economic stimulus--won't get it either. Rich folks who owe $600K on a $1.2MM property will pick up a cheap refi and do no "stimulus" spending.
Meanwhile, the GSEs will have put a bunch of wasted effort into re-writing their guidelines and AUS and pooling models in order to buy these four or five loans they're going to get.
But that's nothing compared to what this is going to do to FHA. If you want to be cynical, that's what I think this is all in aid of. Nobody is dumb enough to propose making the FHA limit higher than the conforming limit. So in order to get all those subprime borrowers into FHA, we have to jack up conforming in order to jack up FHA. Fannie and Freddie will get a couple of probably harmless jumbos and FHA will get a boatload of waaaay too big 97% loans.
But that's nothing compared to what this is going to do to FHA. If you want to be cynical, that's what I think this is all in aid of. Nobody is dumb enough to propose making the FHA limit higher than the conforming limit. So in order to get all those subprime borrowers into FHA, we have to jack up conforming in order to jack up FHA. Fannie and Freddie will get a couple of probably harmless jumbos and FHA will get a boatload of waaaay too big 97% loans.
Tanta
Ahhh, these tricky buggers - in that case does the second aspect from the original article come into play - to wit:
Wall Street MBS traders last beat down SIFMA's door in October when the advent of the Federal Housing Administration's FHA Secure program threatened to taint TBA pools of Ginnie Mae securities. The dealers got their way -- Ginnie Mae created new "specified" pools outside of their TBA issues for FHA Secure.
As per the Ginnie Mae website, I read that :
"What Ginnie Mae does is guarantee investors the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans mainly loans insured by the Federal Housing Administration (FHA) or ..."
So:
Private banks originate loans that are insured by FHA - they then securitize them ( some, many, all ? ) and these securities get a guarantee from Ginnie Mae. And if the FHA Secure model is anything to go by, Ginnie Mae will have to create the same for jubprime FHA insured loans ?
But the central point I guess that's dawning on me is that Ginnie Mae guarantees and FHA insurance IS backed by the govt, not even implied, actually IS backed - so the taxpayer is on the hook ! Shiiitttt. The buggers are trying to do an end run on us.
You still have to have appraisals. The property still has to be worth at least the loan amount. In bubble areas this isn't true now and won't be for years and years.
Stop foreclosure (costing about 50,000 each to borrower, lender, and The Society total estimated loss 150,000 each foreclosure) which is destroying economy and welfare of people; Use technology to reduce costs & interest rates and let market forces with help of Govt thru FHA, Fannie Mae, Freddie Mac, minimize regulations, who basically cover risks and arrange financing and arrange interest rates of below 5 percent in line with Treasury Rate, Fed Rate and charge risk based insurance from poor credit and thus make mortgage affordable to all. And property values will stabilize Estimated national loss due to foreclosures for 8 million homes @ 150,00 each is 1 (One) trillion dolla
I hate myself, but I can't stop...First!
"NEW YORK, Jan 25 (Reuters) - U.S. tax-free money market funds are selling insured variable-rate municipal notes amid fears that multiple-notch downgrades of troubled bond insurer ratings could hurt liquidity in the market.
The selling is driving up borrowing costs for some U.S. municipal issuers as yields on their daily notes have reset to 4 percent to 4.5 percent from the usual level around 2.5 percent.
"We are looking to take our position down to zero," said Steven Shachat, senior portfolio manager at $870 million Alpine Municipal Money Market Fund in Purchase, New York. The fund has liquidated most of its assets insured by Ambac, MBIA, FGIC and XL Capital Assurance, Shachat said."
U.S. tax-free funds liquidate bond insurer exposure
| Reuters
Too funny. LFKAJ. You mean now they actually care about the characteristics of the LOANS that make up a pool?
OFHEO said exactly this would happen lol, that Lockhart guy is nothing but trouble.
So how about if you have a mortgage in excess of 417K that needs refinancing, you come up with the difference in cash, and just re-do the 417k only at a better rate? Like my daddy always said, don't ever feel sorry for somebody with more money than you!
I'm thinking that all these McMansions are exactly the problem, not the sub-prime. Like, just how many McMansions are sub-prime anyway?
Yahoo thinks "mortgage market veteran" is a sufficiently significant phrase to sigle out for special treatment. Is it Tantamount to "escaped convict" or "certified lunatic"?
The selling is driving up borrowing costs for some U.S. municipal issuers as yields on their daily notes have reset to 4 percent to 4.5 percent from the usual level around 2.5 percent.
wow, thats a big jump.
Paint me naive, but I just don't understand the whole stimulus thing, and I don't understand how futzing with the conforming limit is going to fundamentally solve anything. This is not a liquidity problem but an asset-price problem. While raising the limit may allow loans to be off-loaded, how is it going to help those who are screwed by the current price of their asset? How is this going to stablize prices at all? That is the fundamental issue.
And for God's sake what is giving people $300 to $1200 dollars going to do for us? If people feel like a recession is threatening their status, they are going to pay off debt or put the money away. This consumption orgy is over. There are far better ways to invest the money and get results other than trying to have people spend money...especially when our taxes are going to HAVE to go up to cover all of this.
Free money is not free for Pete's sake....
let the selling begin!
We need something more catchy than
LFKAJ.
How about "Fatties Fit For Fannie"? Or "4F's"
And while I've stepped up on my soapbox here, you know what I'm doing with my bonus this year? I am paying off every single debt I have (even my last grad school loans), putting the rest in cash, and buckling up my seatbelt until I can figure out what will rise from the ashes of all of this. And everyone who has half a brain (and I do believe that the majority of the public really does have half a brain) will do the same thing with whatever they get back from their taxes. I bought my primary residence in 1996 and could give a crap less what happens to RE at this point. All I know is at some point there is going to be a great buying opportunity and I'll position myself to be there when it happens...in equities, RE, or whatever sector that gets trashed now hits its low.
That's what smart people should do...write this all off and sit and be patient. Then we can all share a cigar with conjure
I was wondering if the abundance of agency MBS could draw away some demand from tresuries also.
I could see the govt in the short term wanting to compress the spreads between treasuries and MBS if they think that a better housing market will generate more tax revenue.
Trickle-Up Economy
And this is where I get lost. Maybe that's the problem. Most of us don't understand all this stuff.
These traders just don't understand. See, jumbo mortages are risky - we all get that. But these $417K - $700K mortages are CONFORMING -- so they're less risky now.
I love it.
Yesterday I argued that unintended consequences would doom the bailouts. Here you go.
I think it really is time to call for a financial Boston Tea Party. Throw your ARM/Balloon/Jumbo/teaser/no-doc/interest only loan into the ocean and dare the bank to foreclose.
PS - I rent.
I don't understand how futzing with the conforming limit is going to fundamentally solve anything. This is not a liquidity problem but an asset-price problem. While raising the limit may allow loans to be off-loaded, how is it going to help those who are screwed by the current price of their asset?
Raising the CLL is not intended to bailout individual FBs/homedebtors --it's intended to be a first step towards an industry-wide taxpayer bailout of mortgage lenders via the GSEs. Wave a magic wand and suddenly make most non-conforming loans into conforming loans and --Presto! Taxpayer's now the one on the hook.
The problem we are looking at here is not about credit risk, specifically. That's a separate issue. For the moment, it's not about prime or subprime credit.
It's about interest rate risk and prepayment characteristics of large versus average-sized loans.
The TBA market makes "average" assumptions about prepayment because (heretofore) the conforming limits functioned to keep these pools "granular." The traders are saying that they're not willing to price TBA trades the same way if they suddenly have these jumbos tossed in with very different prepayment behavior. The idea is that jumbo borrowers are more rate-sensitive (they refinance at lower rate-reduction increments than smaller loans do), and also they just skew averages if you throw a few $700K loans into a pool of mostly $230K loans.
So the suggestion is to put the LFKAJ in their own pools. Which just makes those "jumbo pools" that have a GSE guarantee. It restores "granularity," but of course it doesn't wave some magic wand that makes a $700K loan behave like a $230K loan. So the point is, we're back to the question of how exactly this move was supposed to lower the interest rate on jumbos by allowing them to be sold to the GSEs.
"I'll position myself to be there when it happens..."
You and everybody else. Real estate is dead.
Its really amusing to watch the dim-witted, cheaply-bought lackeys of the real estate industry that our legislative branch is, keep on charging up the paddles and jolting the corpse.
"C'mon, Joe, stay with me, C'mon...you can make it..."
You know HARM, I'm not that conspiracy-prone. How, for example, is this going to help the lenders with the current portfolio of now jumbos? If the appraised price of the asset and the terms aren't sterling, how the hell can the GSEs buy the loans? What percentage is this really going to help? What are the rules for purchase here?
aw, gross dude! you got a bunch of california jubrimes in your pool!!!
Are most people here under the illusion that Congress & the Fed work for J6pack or something? I mean, c'mon, isn't it completely obvious who this is intended to "help"?
And we did all this because some unemployed guy was sold a loan by a crooked mortgage broker. Nice. Nationalize the banks, forgive all mortgages and start over!
LFKAJ: in ur poolz, killin ur convexity.
"So the point is, we're back to the question of how exactly this move was supposed to lower the interest rate on jumbos by allowing them to be sold to the GSEs."
I guess that would depend on what the price the new pools were trading at.
oooo i like jubrimes
OK Tanta, I get the behavior characteristics of the loan determine the value of the pool. I'm just not sure that this was specifically intended to lower the interest rate as much as it was to kick-start the demand for re-purchases of jumbo loans. Let's face it, in this climate, selling off these loans is very difficult and would be easier if the GSEs had the capacity to buy them. So that would grease the market a bit, or at least that's the theory at the gubmit level.
Listen to yourself Tanta. Granularity? Really, doesn't this all seem even more complicated than it needs to be? Who are you trying to save here? Is is the owner of the mortgage-backed security or the squatter upside-down on his mortgage? We can't save both. Pick one then design a bailout accordingly. All this "stimulus" seems like an attempt to re-inflate the bubble. Cut interest rates so all the subprime folks can re-fi at prime rates and call it a day.
Chuck Prince
Prince
The Artist formerly known as Prince
Loans Formerly Known as Jumbo
coincidence?
Is this really about prepayment risk? Is credit/default risk not relevant to the pricing or are they just reluctant to admit it?
This just seems like an excuse without saying what we all know. Most of them jumbos are in the bubble markets and are much more likely to default.
Raising the CLL is not intended to bailout individual FBs/homedebtors --it's intended to be a first step towards an industry-wide taxpayer bailout of mortgage lenders via the GSEs. Wave a magic wand and suddenly make most non-conforming loans into conforming loans and --Presto! Taxpayer's now the one on the hook.
HARM
and finsihes off the entire mortgage brokering biz...
No wonder, as Tanta said, Mozillo was on his knees begging...
there will only be a few conduits to the gse.
OT: So if the Fed brings rates down to zero or close to zero, why keep any cash in the bank? Why not just put in under the matress? What would banks do for reserves?
Wait, are you trying to say these geniuses in the administration and congress didnt think this through? NO FRIGGIN WAY!!!!
So what if the mortgage brokering bis dies? How did that work for us?
Is this really about prepayment risk? Is credit/default risk not relevant to the pricing or are they just reluctant to admit it?
Yes, THIS ARTICLE is really about prepayment risk, not credit risk.
Of course, if by "this" you mean . . . the entire proposal to raise loan limits . . . or something . . . then I'm sure credit risk is something we'd want to think about.
Really, doesn't this all seem even more complicated than it needs to be?
No.
OK then, Tanta, someone has to take it in the shorts. Who is that? Your pension fund fully invested in MBS or the upside-down homeowner?
Ah the unintended consequence...the irony would be more entertaining if there wasn't going to be so much pain meted out to the innocent while many deserving it go unscathed.
FWIW, any government bailout of the monolines may face a very similar reaction, the cost of government debt (bond rates) will most likely escalate dramatically if the government shoulders that load. And that will likely be MUCH more expensive in the long run as it impacts the servicing of all the national debt.
"Really, doesn't this all seem even more complicated than it needs to be?
No.
Tanta"
But, but, but it must be, our gubmit says this is the fix ;-}
You know HARM, I'm not that conspiracy-prone. How, for example, is this going to help the lenders with the current portfolio of now jumbos? If the appraised price of the asset and the terms aren't sterling, how the hell can the GSEs buy the loans? What percentage is this really going to help? What are the rules for purchase here?
A: The people upping the CLL (Congress) also have the power to lower qualifying standards to whatever they want. If Congress decides tomorrow that the GSEs can start buying up underwater, delinquent Alt-A loans @150% LTV, they can.
"Pick one then design a bailout accordingly."
But that's just the problem, everyone on this ship either floats until they get rescued or they go to the bottom together. You can't save people who paid 30% too much for their house unless they are stuck there until they aren't underwater anymore. That tosses sand in the gears of the RE market and makes prices actually stay down longer because the velocity of house moves decreases and people aren't trading up. So the whole market just stagnates for longer. The real way to do this is to let the market go down fast, for investors to recognize the losses, and for everyone to just get on with it. But this political interference is just going to make this longer and worse.
The best stimulus right now would be to put the government money into credits for investment and expansion or for percentage of corporate revenue related to payroll...but those things will never happen.
OK then, Tanta, someone has to take it in the shorts. Who is that? Your pension fund fully invested in MBS or the upside-down homeowner?
Paul, what exactly is it that you think I am arguing?
I agree with ipodius. Let the market go down fast. You can do this in bankruptcy court or you can create a guvmint low interest loan for everyone. Even the rich get bailed out. Is there a better way?
I want my gummint guaranteed 1% interest no payback nevah LFKAJ loan, and I want it NOW!!!
We need something more catchy than LFKAJ. How about "Fatties Fit For Fannie"? Or "4F's"
Jumbo Fannies?
Tanta, i think this calls for an UberNerd on convexity...
OT, I'd like to see a national poll - how do you plan to spend your stimulus check?
a) Free gas in the tank for as long as it lasts
b) Shopping spree at Wally World on Uncle Sam
c) Stashing it in a nearly negative interest bearing bank acct.
d) Make the minimum plus change on the month credit card bill/s
e) none of the above - other creative betting schemes
Would you agree with this 30,000 foot overview?
We've got Big Problems (characterize them however you will). Attempts to solve BP:
If we extrapolate into the future (with admitted imperfect vision), the pattern appears to be:
Which likely leads to:
Or not. I'm fully aware that history is replete with end of the world pronouncements.
However, the essential pattern I see is that the problems get worse, and the solutions are feckless.
It goes back to what Banker said in August (from memory), "If this thing lasts longer than a couple of months, then things are bad." We're into month 5 and counting.
Tanta, it seems like we are struggling to find a way to make everyone happy. Unless we re-inflate the bubble, that is impossible. We keep shooting down all the trial balloons and never get to the real answer which is a bailout for either the homeowner or the MBS investor. I don't know which you prefer, but the more we tinker, the more complicated this gets. No one can win. Someone wil lose no matter what we do. So we as a society need to pick a horse and ride it. Is it better to enforce contract law or is this situation so threatening that we have to bail out everyone?
Tanta, why wouldn't they put into the new Jumbo/conforming loans a prepayment penalty for refinancing? Could this reduce the timidity of investors to buy into these pools if they new that they would get a penalty fee if the higher balance loans were to try and refi? Also, can you see any scenario where home loan rates could get much lower than 5% to where these homeowners would want to refi anyway? Or do they refi back into 30 year loans to reduce their payments?
I hate to say this but the best package that could be done at this point is to make it EASIER for people to walk away. Think about it: less money spent on legal fees, accurately priced assets, losses realized quicker, and the system kick-started by cheaper houses and more available mortgage money. Also, credit scores tweaked to be better for those bowing out instead of being forced out at great expense. Or even a federal loan program designed to help those burned in this.
Let people out, no taxes on what is owed, better credit scoring, special loan programs, and let those who didn't understand what the word "risk" meant realize losses earlier and therefore lower. Hey, maybe I should be running with Hillary! lol
Again, I agree with ipodius. I'm thinking Resolution Trust Corporation circa 1988.
Jumbo Fannies?
Freddie Mercury would call them "Fat Bottomed Jumbos". They make the rockin world go 'round.
ck, that's a good one, 'Jumbo Fannies.'
Good news for O-Joe and Sebastian, just in time for their weekend: Q4 earnings are now down only 47-52%, year-over-year, up from down (I'm dizzy, now) over 60% year-over-year.
Good news, kind of, sort of, I think, maybe, potentially.
Forgot the link to the 'good news':
The Wall Street Journal Online - WSJ.com Log In
"Freddie Mercury would call them "Fat Bottomed Jumbos". They make the rockin world go 'round."
I'm sensing a rock-blogging moment here...
I am seeking a radical solution only if the threat is real. If all this "depression" talk is gross exaggeration, then just let the subprime slime work it out in bankruptcy court. But if the bad debt is so pervasive as to threaten the entire financial system, then we have to step in.
CR, where's my promised Ambac review results?!
Calculated Risk: S&P: Bond Insurer Review to be Completed Next Week
Tanta, maybe I'm not understanding you. If so, I apologize. I'm a big picture guy and get frustrated with the tinkering. Someone will lose. We have to choose.
Paul, I'm a firm believer in conjure's clock. We are very close to global systemic financial meltdown. Just remember the leverage out there...it's in trillions. If only 5% unwinds, we're in deep deep doo doo. The theme is really (to co-opt that old campaign phrase) "it's the leverage, stupid".
jumbo fannies...px'les
ombudspig patent..!
ipodius, if we really are close to meltdown, I'm not smart enough to know the way out. But we survived the "great depression" and we'll get through this. Really, I can't believe it is that bad.
WTF is this?-
Countrywide Financial Corporation (CFC:Countrywide Financial Corp
diversified financial services provider, will report its 2007 fourth quarter and full-year earnings on Tuesday, January 29, 2008, by press release at approximately 8 a.m. EST. Given the pending merger with Bank of America, announced on January 11, 2008, the Company will not hold a webcast or conference call."
MarketWatch.com
In his remarks, Mr. Greenspan admitted he was caught off guard by the rapid growth in subprime mortgages, saying there was a lengthy delay in data coming in on the products and that when he finally saw official tallies, he couldnt quite believe it.
Somehow I believe this is still going on by many many people paid to know better.
This is amusing. Didn't they ask the traders first ?
So, so far, based on just on the additional prepayment risk for jubprime loans the choices are:
Any other options ? And this is all just based on the extra prepayment risk !
Equilibrium equations apply just as much to money balance equations it seems. Too funny.
And btw, Thanks Tanta for a concrete example of the necessary consequences of this proposal.
-K
CFC will show a profit this quarter...they said so.
Good night Tanta and ipodius. Thanks for listening.
I stand in utter astonishment at how putting this pig into fannie and freddie is going to change the fact it is a pig.
How do you account for all of the folks that are underwater by virtue of declining appraisals and comps?
Or do we just save the 20% down folks on the way down before their down payment is gone to money heaven?
Further, I question how many folks can qualify under full doc conditions?
So this helps the five honest folks out there who bought a house and need to refi- if they can get it done in time.
Once again our politicians have administered a band-aid to would that requires cauterization and stitches.
Gonna fester and get uglier, but looking at wall street, it is obvious that a lot of institutional selling into short covering is going on in the walking dead- check out that huge rise in dead homebuilders- tell me that isn't just some engineered short killing.
Now, what happens when next quarter's numbers are even more dismal?
What needs to happen is that the dead need to be put out of their misery, and the banking system needs to hit the giant Reset button.
Desperate searches for additional stockholders simply resemble searching for a bailout- the last pocket picked will be the taxpayer.
If all of this was so great, how come nobody is selling stock to finance buying homebuilders and banks?
Someday this war's gonna end...
Somehow I think the transfer of Jumbo's to GSE's has more to do with socializing the risk/losses than it does with providing a low-cost alternantive to a homebuyer.
So even with the Tanta truth they may still go for it. May....May? did I just use the word MAY...silly me...will.
I saw the initals and my brain automatically jumped to "Loans Formerly Known as Junk". As a Sacramentian, I think that works.
The irony of the increased risk premium is just delicious >; )
Some guys here in town stole $6 million in mortgage fraud money from the feds. They got five years probation. Smart guys.
This is nothing more than another Milky Way scam to try to hide balance sheet losses and avoid mark-to-market accounting for a while longer. There have been several proposed schemes and there will be more, but they solve nothing as they aren't intended to solve anything. They are intended to obfuscate and confuse, and perhaps during the confusion, the pigmen will offload as much garbage as possible on SWF's and CB's (if we're very lucky).
average joe-
someone don't want the tan-man opning his pie-hole.
Tanta, why wouldn't they put into the new Jumbo/conforming loans a prepayment penalty for refinancing?
Well, they could do that, but you know the GSEs have historically been very hostile to prepayment penalties. They consider that basically anti-consumer unless the borrower is getting a below-market interest rate.
My point with "LFKAJ" is that all we're doing is changing the name. Yesterday they were called "jumbo," today they're called "conforming." That changes nothing about the underlying loan, or the impact of loan size on credit quality, interest rate risk, etc. It's sort of like the teacher going in and changing the curve so that all the kids get an A. That doesn't change the answers they gave on the tests.
Maybe the GSEs will decide that the LFKAJ loans have to have prepayment penalties. But that right there will be doing what Lockhart is demanding: not just yanking up the loan limits, but running these new bigger loans through the analytical process and making sure the terms and pricing are appropriate.
I really do think that a lot of people are behind this plan because they think that we can just keep having oversized loans on overpriced properties at the "same risk" as moderately sized loans on moderately priced properties. Just by declaring them "conforming." If that's what Congress is thinking, then they're going to be a touch disappointed by how this works out.
Question for the politically connected.
What are the chances of raising the CLL being stripped out of the "stimulus package".
I'm guessing slim. But if more people come out against it, could it be done?
With the Stimulus Plan, Bank bailout plans, rate freeze plans, possible monoline insurance plan, and now rasing the GSE limits what else can the US get into being the backstop for? Here is my idea:
Loan Shark Reserve Insurance - You know making money in the underground economy is not easy. By definition ALL of your clients are Subprime Slime. Often, not even a broken leg or a cracked cranium can get a deadbeat to pay his marker. At times like this, street credit contracts, and you get loan shark deflation. This is extremely dangerous because the cost of credit goes way up, and people can face some brutal terms. The government should institute a plan to have cash reserves available to these underworld banks. Only the full backing of the US Treasury can ensure a smooth stream of funds to the strapped true lenders of last resort.
From Association of American Railroads (1/24/2008):
"Carload freight totaled 325,415 cars, up 5.6 percent from last year. Volume was up 10.0 percent in the West and 0.1 percent in the East.
Intermodal volume, which is not included in the carload data, totaled 230,771, up 3.0 percent from a year ago. Container volume rose 4.1 percent while trailer volume was off 0.9 percent.
Total volume was estimated at 33.6 billion ton-miles, an increase of 6.7 percent from the third week of 2007. Freight volume in the comparison week from last year was affected by severe winter storms."
I am assuming this increase in rail may be related to the rise in fuel costs, but on the other hand Intermodal is up 3%. Forestry off but improved, and autos higher than 2007.
I am confused. Anyone on the blog or in the industry who can help me understand these numbers? I understand this is most likely a coincident indicator, but if 'just in time' exists, these numbers suggest the underlying economy is doing well. I am assuming Ben watches these things.
Tanta, at present everybody is guessing at what kind of interest rate is need to make a good loan. We're in a new world now, looking a house price declines - even from here - never yet encountered. The effects on loan risk are unclear. Fannie/Freddie have placed a bet with their implied government money that it's not much worse than we've seen before. The jumbo market is betting it's a good notch worse than we've seen, but nothing outrageous. IMO it's the risk of loss (which the GSEs can cover up) rather than prepayment risk which is freezing up the jumbo market. If there's enough padding on the interest rate and down payments it should be salable.
IOW the problem is basically how much padding is needed for people to be willing to touch a Jumbo Fannie.
I don't know about other commenters, but I'm working harder than ever to understand what's going on. Each new harebrained scheme requires a new ubernerd post about some heretofore undiscovered realm of wonkery, and lotsa new brow-furrowings to understand it.
Yet, somehow, I seem to understand things better than Washington does. How reassuring.
"If only 5% unwinds"
Ipodius,
I just had a pretty detailed scenario laid out for me at a measly 1% uncontrolled. The margin/capital calls would be horrendous. Lets just say we all better pray it doesn't happen...
Chris
We're in a new world now, looking a house price declines - even from here - never yet encountered.
Is it really that hard for financial institutions to understand that, in the absence of other data, it's reasonable to bet that housing will probably return to its historical norms--in terms of rent/price ratio or appreciation since 1997 or whatever?
Are they so much smarter than me that they chortle at the suggestion?
All your jubprime are belong to us.
You are on the way to destruction.
You have no chance to survive, make your time.
Ha Ha Ha Ha ....
12th percentile: Freddie Mercury would call them "Fat Bottomed Jumbos". They make the rockin world go 'round.
YouTube - Fat Bottomed Girls (Queen on fire live at the Bowl 1982)
"Left alone with big fat Fanny, / She was such a naughty nanny! / Hey big woman you made a bad boy [???] out of me! / ... /
Hey, hey!... Hey listen here, / Now I got mortgages on homes ..."
Or if you're feeling a bit more cultured, here's a really gross misuse of Caravaggio's Saint Jerome.
doomerjohnm : My Telegraph
Looks like the stimulus package is going to need its own stimulus package I guess.
"Tanta, i think this calls for an UberNerd on convexity...
bacon dreamz | 01.25.08 - 7:05 pm | #
Oh no you don't... Me thinks sir bacon already knows much of convexity, duration and all that other bond stuff...
I'd be more interested in what if any is the rule of thumb used to determine how much of a rate drop is needed to see an uptick in refi's. Is 50bps enough to get 5% of the pool to refi, 100bps gets 25% to refi, etc...
I think we need for Lockhart to come right out and say in no uncertain terms that either the GSEs have no government backing or they have it. This is another massive unfunded obligation of the government, maybe the biggest.
They need one of these on Wall St. to keep the delusion going
Marijuana vending machine
Marijuana vending machine - Boing Boing
My point with "LFKAJ" is that all we're doing is changing the name. Yesterday they were called "jumbo," today they're called "conforming."
Tanta
You've hit on a superb one liner way of starting and compressing the explanation !
As you go on to point out:
" That changes nothing about the underlying loan, or the impact of loan size on credit quality, interest rate risk, etc. "
Separately, I use the following one liner to open up explanations of the "subprime mess", viz: "People lent money they didn't have to people who couldn't pay it back".
-K
"NEW YORK, Jan 24 (Reuters) - Corporate finance managers are starting to find themselves cash-strapped by one of the very financing tools they use to manage cash flows.
Auction rate securities, debt instruments once touted as a highly liquid cash management strategy, have been hit by the credit crunch and are failing to attract bidders. For companies, the result is that cash once thought to be readily accessible may be locked up indefinitely.
Auditors and regulators are also growing concerned that companies may not be telling investors properly about their exposure to the vehicles."
Lifting the Lid: Auction-rate debt tying up corporate cash
| Reuters
To along with what michi_doc was quoting about strong rail traffic.. The ATA index was posted today..
http://www.truckline.com/NR/exeres/A3080325-9418-44AC-A564-5980CBD50B3C.htm
"ARLINGTON, VA The American Trucking Associations advanced seasonally adjusted For-Hire Truck Tonnage Index jumped 4.1 percent in December 2007, after rising 0.9 percent in November. The latest increase was the largest month-to-month gain since a 6.2 percent jump in December 2006. The not seasonally adjusted index fell 8.2 percent from November to 102.7.
On a seasonally adjusted basis, the tonnage index jumped to 116.7 (2000 = 100) in December, its highest level since January 2006. Tonnage was also up 1.4 percent from a year earlier, marking the first sequential year-over-year increases since May and June 2006. Despite these increases, however, the tonnage index declined 1.4 percent in 2007, following a 1.7 percent drop in 2006.
ATA Chief Economist Bob Costello said the final two months of the year were surprisingly good given the current economic environment, the financial crisis, credit crunch and weak housing market.
Both the month-to-month and year-over-year increases were very encouraging, Costello said. However, the supply chain has changed during the fall freight season, leading to better Novembers and Decembers than in the past, so we shouldnt read too much into the recent data at this point."
Sure seems like a strong showing considering how much everyone is banking on a recession.
michi_doc,
What's the mystery? Rail freight tonnage is a measure of commodity demand and movement. We know that the world can't get enough commodities, especially grain.
Rail freight movement does not measure the flow of finished goods and services in the economy and that's what's sinking.
Also, as oil prices go up, trucking becomes more expensive due to diesel and rail becomes relatively more competitive.
If you want to measure the economy, look at trucking, not rail.
well, they said the Iraq war was going swimmingly because they caught Saddam.
I can't quite figure out the hand-wringing about GSE's bailing out anyone.
Tanta's made it pretty clear. The GSE's have standards that have not been relaxed, so they can't buy garbage. OTOH, if their standards are relaxed to buy garbage, then they can't turn around and sell it to anybody else (i.e., securitize it). That leaves their held in portfolio, which would run out of space damned quick.
This doesn't change squat.
tj "That leaves their held in portfolio, which would run out of space damned quick."
Not if Dodd, Paulson and Pelosi have a breath left in 'em. We haven't seen the half of it yet.
Let's look at trucking.
However, the supply chain has changed during the fall freight season, leading to better Novembers and Decembers than in the past, so we shouldnt read too much into the recent data at this point.
Now I have more questions. In what way has the 'supply chain' changed?
Question for the politically connected.
What are the chances of raising the CLL being stripped out of the "stimulus package".
I'm guessing slim. But if more people come out against it, could it be done?
MtHood: I'm not sure it's so slim. The key is the Senate. Remember, Bush & the House Dems came out with this plan a couple of days ago. The Senate was not in on the deal. The House and the Senate must come up with a compromise in order for this to pass. Also remember that Bush & co are in a hurry to get this thing through so they can hand out the checks. If enough (non-California) Senators realize that this could mean less loans available for people in their states (bigger loans means less total loans) I suspect they'll raise a ruckus over this. If the ruckus gets loud enough, I think the proposal could get dropped in a hurry.
Write your Senators if you live outside of CA.
barely,
So far they haven't gone there, and raising the CLL alone won't do that. I'm not saying it won't happen, but it doesn't appear to be happening yet.
Well tj, the unspoken part is that fannie and freddie are going to pass the dreck to the new new RTC.
Hence, the taxpayer would end up paying for it, if the taxpayer actually paid the entire freight.
Instead we have this insane vendor finance scheme going for an entire economy.
I think the end is in sight for the entire ponzi scheme. Now, if they don't act fast, it will be here before they can do much to avoid it.
That is the truth of the conjure clock. Note that once again precious metals started up again in spite of containment,
Now, Tanta, how much do you think is going to be qualified to do a full doc refi through the gses?
Someday this war's gonna end...
barely: I think we need for Lockhart to come right out and say in no uncertain terms that either the GSEs have no government backing or they have it.
It's not like this is a new concern. Here's a quote from Rick Carnell of Fordham University at an AEI seminar from Feb 3, 2005 about what to do when the GSEs become insolvent.
Debt In The Afternoon (2005)
Now, in fact, if creditors would associate perceived government backing of GSEs with the words national integrity on the Alexander Hamilton statue in front of the Treasury, which means we pay our bills; if that association is there, then these things, thisthen that should be on budget. It should be reflected in the creditthe subsidized credit should be reflectedI see the OMB people are smilingshould be reflected in government spending and it should be voted by Congress, and that would certainly be a different world for GSEs.
michi_doc | 01.25.08 - 8:02 pm |
He is talking about the Christmas stuff showing at retailers right in November and early December. It used to be that you would see a upsurge in Sep/Oct shipping,gearing up for the holidays. With better warehousing and tracking you can actually ship much later thereby keeping less iventory on hand at the retailer.
I would say our early season spike is off by 30-40% with this spread into Nov/Dec...
Chris
BTW,
The "stimulus" checks are supposed to hit around May. Since by then the FFR will be in the 2's, the DOW below 10K, and gold above 1K, it wouldn't surprise me to see a lot of that money headed to the local coin shop.
Talk about unintended consequences.
tj, makes sense, your synthesis of the GSE plan. Nice logic.
Pardon my confusion, but I'll bet I'm not alone.
We have a financial services depression, an RE/CRE depression/pending recession, a health care expansion (with inflation) and the service industry in expansion without inflation. Yet basic goods show good expansion in a 'just in time' environment. The consumer is slowing, but still purchasing.
Just where in the life of a simple Midwesterner is this Crisis that requires Acts of Congress and bail-outs of the rich (not You rich)?
If it were really a crisis, I'd feel free to do the Kwame.
AllenM,
Show me a link to the legislation raising the portfolio caps and lowering the standards. Until then, it's just speculation.
You know we generally think alike, but let's not get too far ahead of ourselves. The downturn is already far outpacing DC; they haven't passed a single piece of legislation yet and it's been a better part of a year since containment was lost.
This is an election year, too. The stimulus proposal is by no means a fait accompli.
What I really want to know: what do I do with my core treasury bond fund (beautiful capital gains and interest the last year, and safe (supposedly)). Risking Tanta's ruler for OT here.
Thanks, Cal and CobraDriver
bofiz:"The key is the Senate."
Yes.. see the following.
Fannie and Freddie loan limit growth could run into opposition in Senate | freddie, companies, fannie - Business - The Orange County Register
"Fannie and Freddie loan limit growth could run into opposition in Senate"
"Sen. Richard Shelby of Alabama, the senior Republican on the Senate Banking Committee, agreed. Raising the loan limits without stronger regulation "enables thinly capitalized entities with recent accounting problems to provide a high-risk benefit to the wealthiest Americans without any real consideration of the need to do so or of the risks it presents to the taxpayer," Shelby spokesman Jonathan Graffeo said in an e-mail."
It aint over. At least some of the Senators realize the underlying issues.
Oh heck, write your senators if you live in CA and tell them this is just stupid. Boxer might listen, even if Feinstein is a lost cause.
AllenM,
I have to assume the rise in homebuilders the past two days is almost exclusively due to the proposed raise in the GSE conforming limits. That's the only thing that makes sense, but I guess obviously things don'thave to make sense.
Still, the fact that DHI's share price is now back above where it was in early September is absolutely mind-blowing to me.
michidoc
find something else to invest in when rates hit 2 percent (where the secret discount rate is).
What, I don't know yet. But the flight to quality continues...
tj-
what, you want to read legislation before it become law? Not with this congress. That is what the compromise committee does behind closed doors.
I predict that fannie and freddie will get larger guarantees to take this dreck on under their guarantees, including a way to put it back to the taxpayers when it goes south.
I would probably buy fannie mae if I really thought it through- the old line banks will profit mightily from the elimination of that upstart wall street innovative financing.
Someday this war's gonna end...
"CIBC May Have $2.63 Billion Backed by SCA (Update1)
By Doug Alexander
Jan. 25 (Bloomberg) -- Canadian Imperial Bank of Commerce probably has $2.63 billion in U.S. subprime investments guaranteed by insurer Security Capital Assurance Ltd., which lost its AAA rating from Fitch Ratings, Blackmont Capital analyst Brad Smith said.
Canada's fifth-largest bank, which has already announced $3.2 billion in writedowns on its subprime investments, faces additional costs from insurer downgrades, Smith said in a note today. Fitch yesterday cut its rating five levels on Hamilton, Bermuda-based SCA's XL Capital Assurance and XL Financial Assurance. Moody's Investors Service and Standard & Poor's are also reviewing their rankings.
If this proves correct, the Fitch downgrade and rising probability of Moody's or S&P following suit could accelerate additional losses,'' Smith said in an interview. Smith, who rates the stocksell'', didn't estimate losses."
CIBC May Have $2.63 Billion Backed by SCA (Update1) - Bloomberg.com
Tanta: I want to check my logic here. Do you find anything wrong with this formulation:
The GSEs have a finite amount of money to loan out.
Therefore: If the conforming loan limit is raised, the number of loans that are made will go down meaning less loans overall.
Oh heck, write your senators if you live in CA and tell them this is just stupid. Boxer might listen, even if Feinstein is a lost cause.
Donna: yes, Californians should definitely do that. However the argument you would make would be that it's fiscally irresponsible due to trouble at the GSEs. Outside of CA (and the NorthEast) the argument is more compelling and will catch a Senator's attention: Higher CLL means less loans available in your state. That way we get them fighting with each other
I had a Federal Judge tell me in his chambers a long time ago that most of his cases involving $$ were simplified in his head greatly by asking "Who benefits?"
bacon dreamz,
Convexity...How dare you bring that up. GAH!...this is brain nubing stuff that will KILL many posters. Talking about the difference in convexity in same duration, same yield bonds might cause some to jibber and drool on their keyboards causing severe damage to their keyboards.
Let Tanta do her thing. Here's a great resource from invetopedia to those who want to melt their brains.
Advanced Bond Concepts: Convexity
Cheers,
Bank Failure-
FDIC: Press Releases - PR-7-2008 1/25/2008
gatsby,
as a victim of unreality in the homebuilders, I can attest to the violence of the climb. I also suspect that is partly hope from raising the limits (although several of the biggest gainers deal pretty much exclusively in conforming already like RYL), and partly from the hope that all will be miraculously cured. I suspect they will resume their crawl to the grave when the Fed hands everyone some disappointment with their lack of movement on interest rates. Why should the fed move again if they were buffaloed by the SocGen unwind?
I think the market is going to be very unhappy by the end of next week with congressional action moving at the speed of a glacier.
Someday this war's gonna end...
The GSE's have standards that have not been relaxed, so they can't buy garbage. OTOH, if their standards are relaxed to buy garbage, then they can't turn around and sell it to anybody else (i.e., securitize it). That leaves their held in portfolio, which would run out of space damned quick.
TJ,
The GSE's don't need to "turn around and sell [crap jumbo loans] to anybody else. In fact, that's exactly the point for raising the CLL and relaxing standards: to leave the GSEs (proxy for "taxpayer") holding the bag. Individual private lenders and banks are not necessarily "too big to fail", but Fannie & Freedie certainly ARE --and the banksters know it.
-Freedie +Freddie
o no no, Misean, the whole point is that Tanta would make it interesting and enjoyable to read about (and maybe even include a picture of a Pig) for people whose brains it might otherwise melt.
This is an interesting question whether increasing the loan limit will increase mortgage rates...I can see the logic but as scared as lenders are right now, I doubt they would be willing to make stated income or high risk loans any more to anyone. LFKAJs will only go to creampuff home buyers and refinancers now who probably don't need much help anyway; I have no doubt that if conforming rates do rise "increased risk" will certainly be the excuse. If all this does is make borrowers with high credit ratings more likely to refi because its easier to qualify at 5.5 percent than 6.75 then it will only help on the margins.
RE: the increased conforming amounts themselves... In some high priced areas of the country, this increase is long overdue because buyers in these areas always pay a rate premium unrelated to the default risk they actually represent. For example, you cannot get a conforming loan on one bedroom condo in Silicon Valley--a place most of you would consider living in, at least--for $417K or less, and haven't been able to in almost a decade now; conforming loan financing is virtually non-existent.
Raising the limit--so long as it is related to the prices in a given area-- rationalizes things. If we are going to have programs which provide federal guarantees on mortgage loans (and to me that's another huge question mark), at least let's be fair, and cognizant of regional differences.
Btw, bankster rational (but evil) self-interest ≠ "conspiracy". It's just the big boys trying to stick it to the rest of us. i.e., business as usual.
PS, what do you mean how dare i bring that up, that's what the whole post was about!
OMG - Convexity - My brain did melt.
HARM,
I just don't see it happening that easily.
If they keep it, then they're obviously putting themselves at risk. If they're at risk, their guaranteed bonds are at risk and therefore no longer AAA.
Furthermore, if any Democrat really likes their chances of taking the White House, why the hell would they want to torpedo their first term by fomenting a GSE crisis? The monolines are nothing compared to the GSEs.
I'd be more interested in what if any is the rule of thumb used to determine how much of a rate drop is needed to see an uptick in refi's. Is 50bps enough to get 5% of the pool to refi, 100bps gets 25% to refi, etc...
The problem is it doesn't work on a "rule of thumb." And bacon dreamz is correct that it would take a long UberNerd post on convexity and option pricing to really answer that question.
The short version: different loan characteristics produce different kinds of refi behavior. In general, the bigger the loan, the smaller the rate drop necessary to see the borrower refi. That's largely because small decreases in rate mean big dollars on big loans (and smaller dollars on smaller loans). Also, jumbo borrowers aren't as sensitive to shelling out upfront fees.
So, there's a fancy set of calculations to arrive at prepayment expectations, and when you plug jumbos into it you get different results than if you plug in (traditional) conforming loans.
Therefore, traders pricing TBA don't know how to value a pool that's a mix of conforming and jumbo. If they were forced to, they'd price it all like jumbo.
TBA pricing is important because, basically, this is how you get rate locks 30-60 days prior to closing. Unless you want to not know what your rate is until the day you sign the note, the lender has to be able to have some sort of forward trade out there that lets the lender set your interest rate that far in advance of actually having a closed loan to sell.
I guess some folks are wondering why anyone should care about this. Well, I for one would care if adding jumbos to agency pools raised interest rates for conforming loans but kept jumbo rates unchanged. That's a direct subsidy of jumbo borrowers by conforming borrowers.
bacon dreamz,
Perhaps, but that uber nerd Accountancy 510 post on last Saturday is still giving me flash back headaches. This I have more of a handle on...by comparison.
Of course I'd read it. And be a fool not to. Still...can we risk this:
YouTube -
Cheers,
TJ,
I honestly don't think Democrats (or any politicians) really understand the scope or causes of what we're facing, nor can they see past the next election cycle. I doubt they understand that by upping the CLLs and eliminating standards, they would in effect, be dooming the GSEs and possibly their own careers.
The pig men and sheeple are bleating for them to "do something!" and that's exactly what they're doing. There's a reason they call it "panic legislation".
The GSE's don't need to "turn around and sell [crap jumbo loans] to anybody else...to leave the GSEs (proxy for "taxpayer") holding the bag...
HARM
They can't just keep them on their books - that would affect their capital requirements; you've need the regulators to sign off on it; they have portfolio caps - FNM and FRE have been really bad boys and there's a voluntary consent agreement to change their ways from 18 months ago:
Media: News Releases > Fannie Mae Agrees to Comprehensive Settlements with OFHEO and SEC
The full agreement is at the same site. Legislation to change THOSE things would be needed if they don't securitize and just keep the loans on their books. No such thing is proposed at the moment.
-K
HARM,
Yes, but "do something" is usually a lot of show and no real go. I suspect this is much of the same -- they want to look like they're doing something, even though they really aren't. Kind of like that HOPE NOW thing.
Tanta,
I think the most likely outcome is a blend, with lower jumbo, and higher conforming, but most of the reasons why gse's have traditionally enjoyed an advantage was the underwriting standards and access to deep stable capital for underwriting purposes.
Remember the gse's were darned near frozen out of the coastal markets from 04 on. They want that business back.
Now, the best thing would be a new fk category, but as was mentioned above, it has to be cheap enough and loose enough standards to keep the jingle mail from becoming an avalanche.
Someday this war's gonna end...
RE: the increased conforming amounts themselves... In some high priced areas of the country, this increase is long overdue because buyers in these areas always pay a rate premium unrelated to the default risk they actually represent. For example, you cannot get a conforming loan on one bedroom condo in Silicon Valley--a place most of you would consider living in, at least--for $417K or less, and haven't been able to in almost a decade now; conforming loan financing is virtually non-existent.
"Long overdue"...? "rationalizes things"?
Oh where to start with this one?
Jonas, the reason why you "cannot get a conforming loan on one bedroom condo in Silicon Valley" has mighty little to do with the current GSE CLL (which btw, was under $250k as recently as 2000), and a whole lot to do with the massive, Fed & government spawned risk-ignoring, cheap-credit-fueled housing bubble over the last 10 years. You might want to do a little research in the CR archives.
bacon dreamz,
The "How dare you" was a bit of clowning. It is false outrage like from Casablanca:
I'm shocked, shocked!
Cheers,
...to keep the jingle mail from becoming an avalanche.
Heh heh,
AllenM, now you're just being silly! You & I both know nothing can do that.
Okay, I'm usually on board w/ Tanta and typically only have to lurk and enjoy, but I'm not sure I really see what all the fuss is about on this one.
This is not much more than a political sop that's not likely to have much if any impact. At the margin, it will add some liquidity to high quality jumbos and might bring pricing down (yes, I understand the point Tanta is making that there's no proof that pricing is "wrong" or "bad" on Jumbo today). As I see it, US banks don't have much balance sheet available for Jumbo, and every day that they have writedowns, they have less balance sheet available. The GSE guarantee on what used to be private label MBS will probably help get the secondary market moving again for jumbo loans. That's a good thing if you care about the US economy (and if I have to prove my chops, I actually moved towns in '05, which meant I sold my place -- I have rented ever since).
But as for HARM's concern about moving the garbage loans from bank balance sheets to the GSE guaranteed MBS, (1) that's not going to happen and (2) you fundamentally misunderstand how the GSEs (and all insurance companies) work.
(1): The on balance sheet garbage will not be GSE eligible b/c there won't be enough equity or income to qualify.
(2): The GSEs have a great business model (don't forget that Freddie's accounting issue was UNDERREPORTING earnings so they'd look smoother in the future). They collect g fees, put their stamp on the securities and then when there's a problem loan, they put it back to the lender 9 times out 10. What a sweet business! Collect insurance premiums and put loans back. Brilliant! This is why the GSE risk to the US gov't / taxpayer has always been overstated.
To sum up, I guess I'm with TJ & the Bear. This is meant to grab headlines and allow congressfolks to show their constituents that they are "doing something" but it ain't really going to do very much. I've got no problem with Kabuki Theater gubmint (like Hope Now). It's things like the medicare prescription plan that really screw us.
that would affect their capital requirements; you've need the regulators to sign off on it;
That should, take about 5 seconds (lol). And if it takes any longer, those stubborn "regulators" can just be replaced with more compliant political hacks, per usual.
In some high priced areas of the country, this increase is long overdue because buyers in these areas always pay a rate premium unrelated to the default risk they actually represent.
Jonas: I suppose the other way to look at is is that the people who have to get Jumbos at the higher rate now are paying closer to the real risk premium as determined by the market.
Price Stout,
No really Bacon is right...it is about convexity...Tanta too though she described and didn't name it.
Cheers,
Well, I for one would care if adding jumbos to agency pools raised interest rates for conforming loans but kept jumbo rates unchanged. That's a direct subsidy of jumbo borrowers by conforming borrowers.
Tanta
Yup, I decided to get off my fat fannie(USA usage) and emailed my CO senators making exactly this point. I really don't usually do this - but this thing got my goat - the whole point of GSE was to:
For more than 30 years, Fannie Mae's mission has been to provide products and services that increase the availability and the affordability of housing for low-, moderate-, and middle-income Americans.
Debt Securities: Understanding Fannie Mae Debt: Introduction to Fannie Mae Debt Securities
Anybody who tells me that somebody who qualifies for a $735,000 mortgage is middle-income or lower is a w*nker.
btw, as pointed out by housingdoom the buggers have changed the mission statement, to:
We exist to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market.
Redirecting from: About Fannie Mae
This is all a f*cking subsidy to the rich( the other rich or that rich too for that matter).
-K
(1): The on balance sheet garbage will not be GSE eligible b/c there won't be enough equity or income to qualify.
Price Stout,
If Congress wishes to change GSE "eligibility" requirements to allow underwater and/or delinquint loans, they have that power. This is what's fundamentally different about government vs. the private sector. They can re-write the rules whenever they please.
And if the situation gets desperate enough for their "base", not to mention mobs of angry FBs/voters, they just might do so.
tj I said the best outcome, not the most likely;-}
There are things that could be done to stop that avalanche, but nobody wants to go there, cause it is a bailout of legitimate borrowers.
Someday this war's gonna end...
Tanta wrote,
"I guess some folks are wondering why anyone should care about this. Well, I for one would care if adding jumbos to agency pools raised interest rates for conforming loans but kept jumbo rates unchanged. That's a direct subsidy of jumbo borrowers by conforming borrowers."
Thanks I just had a "a ha" moment.
HARM, you're spot-on.
HARM, AllenM,
My point is that superficial measures can be easily agreed upon, but when it comes to substantive changes there are a lot more factors to consider. There are lots of people in DC that won't go along, and even more constituents out there that would be majorly pissed off. Heck, just look at the ill-fated immigration reform bill.
Misean -
I completely understand the point of the article, CPRs and convexity, and the traders' complaints.
But I see I wasn't clear. When I say I don't see what the fuss is about, what I mean is the fuss over increasing the CLL. The CPR modeling issues can be solved, and there are workarounds that Tanta herself even offered up like separate pools.
So, I'm in agreement w/ the traders' complaint.
I'm not in agreement that raising the conforming limit is a disastrous step 1 in a path that leads to a taxpayer bailout of the mortgage or banking industry. I think it's a move that's 95% for show and will have some marginal (beneficial) impact on jumbo mortgage liquidity.
I guess what I'm looking for is a non-hysterical, non-conspiracy theory argument for why raising the CLL inextricably equals or leads to a bailout. I'm perfectly willing to consider that argument, I just don't happen to see it myself right now.
But perhaps I'm in the wrong thread!?
Thanks waiting.
This is the point I've been trying to make all day here (but evidently seem to be doing a poor job of).
I repeat:
If Congress wishes to change GSE "eligibility" requirements to allow GSEs to purchase underwater and/or delinquent loans (to "socialize" losses), they have that power. This is what's fundamentally different about government vs. the private sector. They can re-write the rules whenever they please.
I don't think that recognizing the above truth automatically makes me a conspiracy nut, or doomster. This is just the political reality of the situation we're facing.
The politicians and banksters will do whatever they think is in their best interests to avoid losses, economic, political, or otherwise. Whether or not those actions really are in their long-term best interests is another matter.
Traders yesterday were referring to these loans as jumbo lites.
More in a moment.
How about a little round of applause for Senator Shelby?
HARM,
Of course they can do it if they want to, but the chances of doing it -- at least right now -- are slim to none.
sk,
Sorry dude, but you don't know CA. I have a very dear friend who makes $65K who sold her condo in 2005, got $80K in payout and bought a $505K condo with a jumbo neg am for $425K. When the neg am reset she took out a toxic IO. She couldn't afford that either but the shiesters gave it to her.
She has 3 kids, divorced, and the eldest will be 18 in 16 months (meaning the child care money from hubby goes to 0 then).
She is not rich. She got swept up into the bubble. This is repeating throughout SoCal. Criticize all you want...but here those loans didn't necessarily go to the RICH...the people who your envy is pointed at.
(def of envy:
"Aristotle (in Rhetoric) defined envy "as the pain caused by the good fortune of others", while Kant defined it as "a reluctance to see our own well-being overshadowed by another's because the standard we use to see how well off we are is not the intrinsic worth of our own well-being but how it compares with that of others" (in Metaphysics of Morals)."
She was foolish and possibly defrauded. She and her kids (3) are paying a price.
Don't be so fast to have Envy drive your decision making, or your analysis. The Pigmen have corrupted much.
Cheers,
@TJ,
Ok, on that much I can agree with you. If the housing & stock markets and overall economy continue to deteriorate, however, tomorrow may be a completely different story.
I repeat:
If Congress wishes to change GSE "eligibility" requirements to allow GSEs to purchase underwater and/or delinquent loans (to "socialize" losses), they have that power.
Repeating in general doesn't advance your side of a discussion. Repeating in a written forum doesn't ever.
But I'll take this on anyway. Let's just assume Congress acts as you say (I'd put the probability at
Price Stout,
I wasn't arguing separate pools, but combined pools, which is the posts point.
Cheers,
No siree bob, these jumbo mortgages are known in fixed income parlance as highly 'negatively convex'. People in these loans exercise their prepayment option in a ruthless manner. Therefore the cost of hedging them is higher than standard conforming products. I doubt the GSE's would aggressively add these to their own retained portfolio.
HARM,
They can rewrite, and change the game and maybe they will. Again, not my argument.
Cheers,
Price Stout,
I felt this was a critical point and was basically being ignored or skimmed past, so I bolded it & repeated. My apologies if this violates blog ettiquette, but I don't have moderator rights here, and don't know how else to draw attention to something I thought was important to convey.
agh... my 9:25 post got eaten.
So here's the short version:
I put probability at
Price Stout,
Try spelling out "less than" instead of using the sign.
Rusty,
"People in these loans exercise their prepayment option in a ruthless manner."
That's it man. That's the point. Although I suspect in CA it may not be. And maybe that's another point. Prime bubble areas people who normally could not get Jumbo's DID. I gotta parse this in my brain...which hurts. But those not in high puffing (insert bong reference here) bubble areas just don't understand the stupidity of this market.
I will defer to dr. housing bubble for anyone interested in the conundrum.
Special Edition: Real State of Genius: Today we Salute you California with Our Real Home of Genius Award! 10 Homes throughout the Golden Bubble State. » Dr. Housing Bubble Blog
Cheers,
double agh! what is going on? I can't seem to post. I'll keep it really short:
GSEs are private with shareholders who demand equity returns. No one they take on stupid credit risk, even if congress "allowed it."
They have really smart analysts who focus on minimizing their credit risk via repurchase demands, adjusting g fees and cutting off lenders who send garbage.
(here's hoping third post is the charm)
For the time being, the GSEs are living by OFHEO's rules on capital (haven't heard that we're throwing those out yet) and the reality is that they are having trouble just holding on to what they have on the portfolio now. Given how they account for their derivatives, it is almost certain that they will have to raise more capital after they print their Q4 numbers. Ceteris paribus this crowds something else out of the GSE portfolio or draws capital away from some other mortgage portfolio.
The GSE have dramatically scaled back the amount of IO/high LTV/Low FICO/etc higher risk loans they are doing as a result of the capital constaints (to say nothing of the way they have performed). The GSEs are not in a position to wave a magic wand and save the housing/mortgage market.
I was at a mortgage credit conference today and there was a very strong consensus that these jumbo lite loans would not be pooled with conforming loans. The best guess was that this move might cut the current jumbo/conforming spread in half.
Of course, the Paulson/Pelosi/Bonehead troika didn't stop to think about any of this, nor did they think about how they would sieze up the jumbo market while this plan works its way through Congress. When the market got wind of this, prices on jumbos hit the floor because no one wants to hold them knowing that jumbo holders will have a much stronger propensity to refi when this gets put into place. So if you want to know why jumbo rates jumped 50 BP yesterday, you can think our august leadership in Washington.
tj&b -- oooooooooooh!
thx!!
Brian - fascinating post, thx.
HARM, tj: They won't need to re-write the rules in the near-term. The pain will come later. God help the next president - and the taxpayer. Read my lips...
Sorry dude, but you don't know CA. I have a very dear friend who makes $65K who sold her condo in 2005, got $80K in payout and bought a $505K condo with a jumbo neg am for $425K. When the neg am reset she took out a toxic IO. She couldn't afford that either but the shiesters gave it to her.
She has 3 kids, divorced, and the eldest will be 18 in 16 months (meaning the child care money from hubby goes to 0 then).
She is not rich.
Actually, I'd qualify for a 730K loans so don't impute motives of envy without checking please.
Regarding your friend - what can I say.. except at $65K( total income ), with 3 kids I can't see how she will qualify for a $425K loan (its 6 times income for gawds sake) - jubprime or not.. so its moot. If she does qualify there there is other financial data that you aren't sharing with me but just presenting an emotive anecdote. I sympathise but people in CO ( and so many other states derisively referred to as flyover states ) should pay for this ?
-K ( previously 15 years in Cali - loved it too)
Now that we've established our agreement that Congress has the power to re-jigger GSE requirements as they please, we can debate the probability of it happening.
If things don't get markedly worse, macroeconomy-wise: very low.
If the $hit really hits the fan: not out of the realm of possibility.
Of course, even eliminating standards and setting the GSE CLL @10 million won't save the housing market, though it could very significantly slow its decline (see Japan c. 1990-2006). But we're not talking about a rational reaction to mildly troublesome situation. We'd be talking about a freak-out reaction to a full blown panic.
GSEs are private with shareholders who demand equity returns. No one they take on stupid credit risk, even if congress "allowed it."
I'm sorry, please help me out here: what does the "G" in "GSE" stand for again?
Don't be prejudiced. I am hoping for the biggest bailout that I can get.
There's enough bad stuff happening right now without getting hysterical about worst-case scenarios of government lunacy. Okay, I accept we are teetering on the brink of lunacy already, but the GSE bonds are not backed by the gov the way bank deposits are backed by the FDIC.
That said, it may well be that if the GSEs really were near collapse, the gov would feel compelled to bail them out, because they are so important to the housing market and the rest of the economy.
But we are not there yet. No matter what congress does, the GSEs are private companies (despite that G) that get to make their own decisions about what they do. Why would they act to bring on their own collapse, if it can be avoided? I'm still hoping that it can and will be avoided. I choose to get hysterical over the lunacy of the rebate checks.
waiting_
By the time it gets that bad, the GSE's will already be declared insolvent and will be in need of a bailout themselves. So, your point was what?
what does the "G" in "GSE" stand for again?
Snappy!!!
Sadly, this feels like the Crossfire-ization of discourse.
The CEO and CFO of a publicly traded company are not going to knowingly take on terrible credit risk of upside down and/or no doc and/or pay option ARM loans. It will never happen.
To make it incredibly simple: if they refi'd out the garbage, shareholders would dump the shares, driving share price way below book value and making almost impossible to raise the additional capital they full well know they are going to need given the developing housing crisis. There isn't even a conspiracy theory that would make this plausible, much less likely.
If you want to worry about bailouts, focus on where the government and taxpayers have actual exposure: directly via the FDIC and indirectly via FFR, for starters.
Well, the FFR is going to zero somewhere in the next year or two, so... next question?
Okay, I accept we are teetering on the brink of lunacy already,
Thank you. Raising the CLL to ~$750k in a state where the median income is around $55k (CA) is sheer madness.
but the GSE bonds are not backed by the gov the way bank deposits are backed by the FDIC.
This doesn't matter, because the "implicit" guarantee is already there (which is why GSE-backed securities considered so "safe" by investors and basically traded as if they were T-Bills). All Congress has to do is re-write the rules anytime they please to make it an explicit guarantee.
But we are not there yet.
Agreed.
Why would they act to bring on their own collapse, if it can be avoided?
Because a GSE is not a person, much less a rational one. It's simply a political & economic entity run by self-absorbed powerful rich guys, just like any other large company. If those guys at the top can be bought off and given a large enough golden parachute to pursuade them to "take one for the team", it could easily happen --especially if things get really dire.
I don't think we disagree about the current situation, we just disagree about the probability of a full-scale taxpayer socialization of bad debt.
Is this the basic idea on convexity and jumbos in pools?
Put jumbos in a pool, and bondholders get a smaller plate of mortgage pig pork chop than expected when the Fed puts a cleaver to rates? Therefore, bondholders demand higher rates to hold any bonds containing jumbos?
Sorry if I'm being a bit thick.
@Price Stout,
I just gave you a scenario that doesn't require a conspiracy --merely rational self-interest and lots of political pressure.
Anyway, we obviously have a fundamental disagreement. Let's move on.
sk,
Not my point.
Point is this:
"except at $65K( total income ), with 3 kids I can't see how she will qualify for a $425K loan (its 6 times income for gawds sake)"
She did qualify. She has the loan.
"I sympathise but people in CO ( and so many other states derisively referred to as flyover states ) should pay for this ?"
NO! That's not what I'm saying. But you're earlier post linked all who had Jumbo's as rich. I was trying to point out that here in CA...that is not the case.
As to the envy thing, I apologize, it wasn't directed necessarily towards you. But just toward a general knee jerk that anyone getting these loans is rich. Which leads to a disgorgement of EFF! the rich.
Cheers,
Need help for mom here.
Mom is currently 30 days behind on mortgage. has bad credit and a 30 yr fixed over 7%. She tried last yr to refi but due to credit couldn't. Now due to husb being on and off work in auto co she is 30 days behind and scared she could fall further. If rate was lowered by around 2% she would have good chance at being timely since this would save about $300 month which is a lot for her.
Question: Should she call risk mitg and ask to get rate lowered or would they want to see her more than 30 days late? What are her odds if she has bad credit?
Geee, anyone think a bank closure in KC will bring folks here out of their 'it's all good' and 'it's different here' denial?
Dumb Underwater Mortgage Bond Offerings
DUMBO's
bows
HARM - to the contrary, this IS a conspiracy theory:
If those guys at the top can be bought off and given a large enough golden parachute to pursuade them to "take one for the team", it could easily happen
Do you have any idea how much legal liability would be involved for Mudd and Syron were they to do this? Are you familiar with SOX? With O&D fiduciary responsibilities to shareholders?
Your scenario is an absolute impossibility. And I think you fundamentally misunderstand the critique of the "implicit" guarantee, which is that Freddie and Fannie might turn out to be terrible risk managers and therefore fail or turn out to be dramatically undercapitalized. It's not that they'd knowingly destroy themselves to "take one for the team."
What team? Do you think Mudd and Syron work for Bush? Bernanke? Pelosi? Paulson?
They work for private companies. The odds of Freddie and Fannie refiing out underwater loans are precisely the same for, e.g., as XOM doing it. Zero, despite both companies being very "political" entities, reliant on on the USG to keep their "COGS," for lack of a better term, down.
I don't understand how futzing with the conforming limit is going to fundamentally solve anything. This is not a liquidity problem but an asset-price problem. While raising the limit may allow loans to be off-loaded, how is it going to help those who are screwed by the current price of their asset?
If you're a politician, it may solve all your problems for the next several years if it makes you look like the good guy a few months from now.
What else matters? Peoples' welfare?
That's like saying a hedge fund manager cares about his clients' wealth.
The system is simply not designed for that to happen.
What matters is that you can convincingly appear to be that way for a long enough period of time to get yourself "in the money".
Politicians will start to look out for the welfare of their voters only when the voters are smart enough to hold them accountable for their welfare. And no sooner.
rcyran,
"Put jumbos in a pool, and bondholders get a smaller plate of mortgage pig pork chop than expected when the Fed puts a cleaver to rates? Therefore, bondholders demand higher rates to hold any bonds containing jumbos?"
No not really. I've had now too many martinis to go there.
Cheers,
Well, the GSEs are officially corporations, but most people think they're wereagencies. It's rumored that when the moon is completely dark or they are mortally injured that they will shapeshift into an arm of the government immune to market forces and with access to the strength of unlimited capital. Just a rumor, never been seen, but a lot of people are counting on it.
ac,
You're a profit:
"If you're a politician, it may solve all your problems for the next several years if it makes you look like the good guy a few months from now.
What else matters? Peoples' welfare?
That's like saying a hedge fund manager cares about his clients' wealth.
The system is simply not designed for that to happen.
What matters is that you can convincingly appear to be that way for a long enough period of time to get yourself "in the money".
Cheers,
The closest thing we've got to an Ubernerd on convexity is
the clockwork mortgage post from Tanta in September.
As noted there, the posting of a convexity Ubernerd is a long-standing threat.
What team? Do you think Mudd and Syron work for Bush? Bernanke? Pelosi? Paulson?
Frankly: yes.
@Fair Economist: LOL
ac nailed it.
"I'm sensing a rock-blogging moment here...
ipodius"
Here you go:
YouTube -
"Take a load off (F)annie..."
Blue Steel,
Nice pull.
Cheers,
attempts at lining up scapegoats-
"Jan. 25 (Bloomberg) -- Goldman Sachs Group Inc., Citigroup Inc., JPMorgan Chase & Co. and 23 more underwriters of Countrywide Financial Corp. were sued by three New York agencies for allegedly helping the home lender defraud investors.
New York's city and state comptrollers and their pension funds added the securities firms, two accounting firms and Countrywide officers and directors as defendants in a federal securities-fraud lawsuit filed last August.
The underwriters and accountants enabled Countrywide to release false statements. Investors lost millions and New Yorkers lost their homes,'' New York State Comptroller Thomas DiNapoli said in a statement.We need to recover the pension fund's losses and find a way to help all those families.''
Countrywide's Underwriters Sued for Fraud by New York (Update2) - Bloomberg.com
I like big jubs and I cannot lie...
risk capital,
Great post. I've been saying that this is the next big boot to drop. Avalanche ahead.
Cheers,
Misean wrote:
She did qualify. She has the loan.
She qualified for a IO and a negAM 425K - she wont' qualify for a conforming full 417 K will she ? (its 6 times salary with 3 kids for gawds sake !) - else why didn't she just get one and do a top-up second ? or do one now ? her LTV 425/505 looks good, looks alright.
NO! That's not what I'm saying. But you're earlier post linked all who had Jumbo's as rich. I was trying to point out that here in CA...that is not the case.
Actually I didn't say jumbos I disputed that anybody who qualifies for a 735$ loan is middle income, i.e that if they qualify for a 735K loan they are rich( the other rich or the same one too for that matter ).
I know my median income, mean income, poverty level figures - obviously 65K isn't rich - with 3 kids even less so; but with 65K you ought to restrict yourself to and to qualify in a conforming loans world for 200K or so.. so if she went for a GSE loan it would be for wayy less than 417K so she ought to get it and quite rightly too - that IS the charter of the GSE ( cf my earlier post ).
What the heck is she doing with a loan of 425K ?
As to the envy thing, I apologize, it wasn't directed necessarily towards you.
No worries man. We are all adults here - and gone tomorrow ( lol
.
-K
The TBA market makes "average" assumptions about prepayment because (heretofore) the conforming limits functioned to keep these pools "granular." The traders are saying that they're not willing to price TBA trades the same way if they suddenly have these jumbos tossed in with very different prepayment behavior.
Tanta | Homepage | 01.25.08 - 6:42 pm | #
I would think that prior pre-payment assumptions would be unreliable considering the run up in home price appreciation. I defer to the expert but that seems a little like relying on the models and embedded assumptions that got us into this mess in the first place
misean- unfortunately, this is going to dominate the headlines for quite sometime it seems.
more also on potential hedge trouble from the wsj-
"
Much of the nervousness Friday surrounded hedge funds, and whether a large fund was unloading stocks amid big losses. One area of concern surrounds so-called quantitative funds, which base their trading on computer models and saw deep losses when stocks fell in August.
Losses are hitting those using a strategy known as price momentum, a bet that winning stocks will continue rising and losing stocks will keep falling.
Hurting these funds lately were unexpected tumbles in stocks that momentum players favored, including Apple, Google and a group of alternative energy stocks such as Sunpower.
Stocks the quants expected to continue falling, meanwhile, suddenly jumped higher, including bond insurers Ambac Financial and MBIA, as well as home builders such as Ryland Group."
Rally in Stocks Fades on Rumors On Hedge Funds - WSJ.com
Going back to last summer, my bearish strategy has been based on a simple idea. I felt some P/E ratios were too high and we would go through a stretch of deep earnings contraction. So, if you could identify sectors with the highest P/Es and deepest contraction, you could win bearish.
So far, it's worked pretty well, except I didn't forssee the implosion in financial P/Es and missed SKF.
Just to get an update and fresh perspective, I revisited ProShares site today to check P/Es. Here they some for double short ETFs.
Russell 2000 TWM 40.82
Nasdaq QQQQ PSQ 34.38
Japan EWV 31.36
China FXP 24.51
RE SRS 21.31
Semiconductor SSG 21.00
Tech REW 20.21
S&P SDS 18.51
Health care RXD 17.73
Emerging markets EEV 17.02
Financials SKF 13.32
I then ranked sectors where I think earnings are most vulnerable over the next 6-12 months, and here's my picks.
So, I confirmed to myself that the best possible double short pick is still TWM (Russell 2000). SRS is still a good volatility trading play, and EEV, FXP, and EWP are still probably worth a shot.
I've never felt totally great about shorting tech, because I tell myself that I don't want to go against Microsoft, and today I'm glad I didn't. But tech/NASD looks weak now, too, especially semis.
I think health care (RXD) is a special situation and maybe an attractive short due to near-term political situation and typical Wall Street overreaction. Don't bet the ranch on it.
That's my 2 cents.
I might add that "david_in_ct" was defending "market neutral" startegies and reports suggest that these morons weren't quite as "neutral" as they thought and were actually, "neutered".
CR/Tanta - do you guys not take Amex?
risk capital
"misean- unfortunately, this is going to dominate the headlines for quite sometime it seems."
And that is just sad...as the gummint works to bail out war shriek.
We need a rise up. Bad! like this:
YouTube -
Cheers,
Gary,
AMEX has been very very good to me.
Cheers,
you know, there is all this talk about, "let em fail", they @##$%ed up and this is what they deserve.
I am really mixed here in emotion, especially when it relates to the monolines, the implications of a failure I'm afraid would be much to widespread in a system which is attempting to recover.
I think that some here actually wish for failure without thinking through the potential implications-
be careful what you wish for.
Misean | 01.25.08 - 10:11 pm | #
Yep,these kinda stories are gonna play out over and over and over in the next few years. A young guy at work probably makes 50-55k...talked into a 390k house. He is one of a couple I know of for sure.
The only thing i accomplished this run up was talking my brothers friend out of a IO loan. Convinced him 80-20% down was the only way to fly...
Chris
Cobra,
Yeah it's gonna kill a lot of us...Our friends and family who don't get it are gonna burn. The question is How do we help them? I dunno, but I want to, and yet can't afford to.
It breaks my heart...and I don't know what to do...
I try but I don't want to kill myself to do it.
Maybe I should sacrafice myself for them....I don't know. Because I would.
Cheers,
This is very interesting-
"DAVOS, Switzerland The chief executive of Moodys, the credit rating agency, conceded on Friday that his agency had made significant mistakes in the rating of structured finance products, but added that the agency had been deceived by people who put together the products."
Moody's Official Concedes Failures in Some Ratings - NY Times
On that note,
YouTube - The Smiths - Panic
"I am really mixed here in emotion, especially when it relates to the monolines, the implications of a failure I'm afraid would be much to widespread in a system which is attempting to recover."
risk capital,
misean posted this list last nite. I ran it by a relative who has been in forensic accounting his whole life. His response...Pretty accurate.
I mentioned this before,the numbers are so large that if even 1% faced capital/margin calls a whole shitload of companies will cease to exist...This shitty paper is EVERYWHERE. And before yesterday I was a "Burn'em all down and pick the ashes up".
Chris
Thanks misean!
Drop ratings on monolines enough and we have a real proble.
That's a snap shot...It's not a thesis. There are simplifications here.
then there is this,
YouTube - Ozzy Osbourne - Crazy Train
Cheers,
Cobra,
You're my brother...
I need to talk to ya. damn that was friggin scary, and I'm out of martinis again.
if you could email me at zaphod@fsklaw.com
The rest of you please respect this...I and cobra will post on tis as is possibble, no release of confidential info...but let the email go...i won't respond to much but cobra....
I hate doing this but send me the data cobra...if you can.
Cheers,
Misean...
I am really lucky that nobody in my family bought a house or overextended themselves during this run up.
Heck the only thing that saved me was living in Socal during the 80'/90-'s. I saw the run up and crushing drop. I looked for property when I got to Fl and thought "How do people afford this?".
More people I work with seem to be heading to our point of view...
BTW...great choice of tunes !!!!
Chris
Im friggn new here and have not strapped on my laser to my shark head, buy, here goes:
7."Street is on high alert": Yah, me too!
DH
Wait I should have put in # 7b: Street is on high alert"
You friggn mean SIFMA is on high alert and they will buy anyone they need to get more rate cuts and dig deeper into mortgage fraud and pension fraud
The American Securitization Forum wrote the rate freeze presented to the public by the President and the Treasury Secretary.
It can be found it at americansecuritization.com
The framework allows servicers to modify loans without borrower signatures.
Source: American Securitization Forum, Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans, Executive Summary, December 6, 2007, page 13, third paragraph from bottom of page
Counseling and modification expenses are to be charged to securitized trust cash flows, so service providers, like Countrywide, which has a representative on the board of the American Securitization Forum, will profit from the process.
Source: American Securitization Forum, Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans, Executive Summary, December 6, 2007, page 7, first full paragraph
Appraised value for modifications are based on the date of origination, even if the current value is much less.
Source: American Securitization Forum, Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans, Executive Summary, December 6, 2007, page 2, second bullet
According to the American Securitization Forum's Framework for the rate freeze, borrowers will not have to document current income to be eligible for refinancing, even if they received initial loans with embellished incomes
Source: American Securitization Forum, Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans, Executive Summary, December 6, 2007, page 3, FICO test
Freddie Mercury would call them "Fat Bottomed Jumbos". They make the rockin world go 'round.
That would be Brian May, rather than Mercury. Freddie may have sung the words, but that was a May written song.
Cobra, and ohers,
Cobra posted my analysis up above:
thanks cobra:
Drop ratings on monolines enough and we have a real proble.
That's a snap shot...It's not a thesis. There are simplifications here.
If you need more guidance ring me in the morn..cuz I've had too many martinis and am out of the game. I'll leave you with this to understand:
YouTube -
Night all.
Cheers,
Failed Bank Information
Douglass National Bank, Kansas City, MO, Closing Information:
FDIC: Failed Bank Information - Bank Closing Information for Douglas National Bank, Kansas City, MO
Some commenters have implied that the banks need to be willing to fund mortgages going forward. I suggest that the banks dont provide money, theyre usually just a middleman for investors.
Who are (were) the major investors? Look at the balance of payments. In the last 7 years about $4.2T have gone overseas; the current rate is about $0.8T per year.
Foreign holders of dollars need to invest them somewhere, and over the last several years, many of them have gone into the US mortgage market. Returns there were superior to treasuries, especially in the early part of the decade, but considered safe. They also believed that real estate only goes up.
CR has observed the correlation between the trade deficit and MEW; with no hard evidence of causality. I posit that to some extent the trade deficit caused MEW growth through easily available credit provided by foreign dollars.
Now that theyve been burned there theyll be looking at alternative dollar investments. The pool of mortgage money will shrink and the next bubble will start developing. Maybe weve already seen its naissance as SWFs are investing in US corporates and banks.
Ok, you guys who mentioned 1% to 5% unwindings, and disaster therefrom.
I remember reading that stuff like that was happening before the great depression I, but I guess that once you get past the first leveraging, I don't understand it anymore. Also, I'm sure that what I don't understand about leveraging has gotten more complicated than GD I machinations.
This is something that I don't understand precisely, and yet I feel is a problem bigger than any other mentioned. Exactly what does this mean? Is that conjure's global financial meltdown? And what would a global financial meltdown mean? All money at all banks gone to zero, or as close thereto as makes no diff?
Lawerliz,
I could but I'm hammered. post tomorrow, or next week...I think I have what you want...but I can't research...just typing.
Cheers,
OK
I'm done, gonna do some 80's hard metal.
Night.
Cheers,
Ambrose Evans-Pritchard in Davos: U.S. slides into dangerous 1930s 'liquidity trap'
Davos 2008: US slides into dangerous 1930s 'liquidity trap' - Telegraph
80's hard metal? What about this?
.S. Rep. Paul E. Kanjorski is calling for an examination of the bond industry to determine the impact the recent market volatility will have on local municipalities.
Kanjorski, D-Nanticoke, Friday said he will convene the House Services Capital Markets, Insurance, and Government Sponsored Enterprises Committee, which he chairs, to gather data and seek remedies.
Kanjorski said he wants to know if there is a need for regulatory reforms in the bond industry and the extent recent downgrades of bond insurers ratings will have on future municipal projects.
The current market volatility has proven unfortunate for many, Kanjorski said in a press release. The recent bond insurer ratings downgrades, and the possibility of more on the horizon, could have ricochet effects on the financial marketplace and municipal governments, including many in Northeastern Pennsylvania.
TAF continues on the 28th. $30 billion more to keep the banks open.
http://tinyurl.com/ywad4n
Tanta,
Isn't the risk of these higher loans already priced into the conforming adds for high LTV and low credit score? That's where the majority of these are going to fall simply because of the falling home prices in California.
FHA is the entity that doesn't have any additional risk priced into their expanded standards.
The Late Night Night Show With Doc Holiday
Appearing with Reid Friday, House speaker Nancy Pelosi also piled on Bush.
"The president has his head in the sand on this war that is for him a war without end, no end in sight," she said.
One thing Bush and Pelosi agreed on was that they had worked together well to put together this week's economic stimulus deal, and that Congress needs to pass it right away.
Treasury bill, note and bond issuance is expected to climb to $125 billion during the first quarter of this year, a jump from the $34 billion issued in the recent fourth quarter and $80 million during the first quarter of 2007, the securities dealers surveyed by the New York-based organization said.
SIFMA officials also expect the 2008 federal deficit to escalate to $228 billion from the $162.8 billion in 2007.
Goodnight and Godbless your cash!
The Road to Hyperinflation.
"The current credit crisis has evolved from the unregulated global growth of structured finance with the pricing of risk distorted by complex hedging which can fail under conditions of distress. The proliferation of new market participants such as hedge funds operating with high leverage on complex trading strategies has exacerbated volatility that changes market behavior and masked heightened risk levels in recent years. The hedging against risk for individual market participants has actually increased an accumulative effect on systemic risk."
Nothing new to regulars of this site, but a useful summary nonetheless.
Asia Times Online :: Asian news and current affairs
Lawyerliz,
Until Misean sobers up or other finance heavy hitters are online, let me try: the risk is not so much as all the money goes away as all the money goes nowhere - metaphorically, money is the grease for the engine of the real economy - if the velocity of money in the economy drops to zero, we get the same thing as the car engine running without any oil...which I believe the knowledgeable car folks describe as 'bad.'
Of course, plenty of money is also going away (well debt really but fungible or money equivalent).
The great fiscal stimulus package ... of 1929
The great fiscal stimulus package ... of 1929 Outside the Box - MarketWatch
Wall Street Life - Make way for the trophy toy boy as rich older women turn the tables...
Make way for the trophy toy boy as rich older women turn the tables - Telegraph
mike morgan
Bank inventory Ive written about this a little. Were seeing this problem start to pus up. I figure it will take about another 8-12 months before it pops. Basically, the banks have no clue what to do with the properties they are foreclosing on and the properties where buyers have stopped paying their mortgage. There are some extreme examples, but were seeing the same basic problems nationwide
It will also be an investment opportunity for a large fund to step in, providing they have their ducks in a row before approaching the banks
this should be made illegal, or only if it's for rental only...
I think "stimulus package" sounds more like porn instead of economics
Lawyerliz- "Is that conjure's global financial meltdown?"
Yes, in a nutshell.
mp, ever been a cult leader before?
No.
If you're referring to Conjure's predictions about the possibility of a liquidity trap, Conjure and I talked about a nascent liquidity trap here over six months ago.
Now, Stiglitz is talking about a possible liquidity trap. If that's a cult, then count me in.
I expect one day the market will fall 1500 points, ex-homeowners will be rioting and burning down their old neighborhoods in SoCal, The presidential frontrunners will drop out of the race and people will be logging on to ask..."what does the clock say? Is it 58 or 59 seconds now?
I hope you're wrong, just as I hope that Conjure and I are proven wrong.
We want to be proven wrong. I hope Bernanke can do that.
Later Night With Doc Holiday:
Where the Friggn Fuc_ was I when this came out?
- NY Times
The accord was announced by Speaker Nancy Pelosi of California, Representative John A. Boehner of Ohio, the House Republican leader, and Treasury Secretary Henry M. Paulson Jr. at a Capitol news conference and hailed minutes afterward by President Bush as the fruit of patience, determination and good will in both parties.
Re: Ms. Pelosi said the package was aimed at the middle class
I think she meant to say the middle class of underwriters will reap a windfall from my sellout to The American Citizens that have no clue what Im doing with The SIMFA Lobbyists!
Re: Speed is of the essence, Mr. Paulson said.
Speed, we need more friggn speed, can someone please get Paulson some more coke or meth and whack him with a giant dose of SIFMA Kickbacks & daytrader monopoly money (and a get out of jail card)!!
he Securities Industry and Financial Markets Association (SIFMA) today applauded the New Democrat Coalition for supporting legislation to remedy the current visa shortage that has impeded America's ability to remain competitive in the global market.
In a letter addressed to House Speaker Pelosi (D-CA) and Majority Leader Hoyer (D-MD), and signed by 16 members of Congress, the Coalition urged House leadership to "take action this year to resolve the immediate talent crisis that is facing U.S. employers." The letter further stated, our outdated visa programs for the most highly skilled workers from abroad are hopelessly out of line with the needs of the U.S. economy."
Congratulating the Coalitions efforts, Marc Lackritz, SIFMA president and CEO, stated, We believe a bi-partisan solution will strengthen U.S. economic competitiveness, cement the U.S.
See Also:
House Minority Leader Nancy Pelosi (D-Calif.) took the House floor last night to demand an investigation into the Foley matter. But Boehner headed her off, calling on the House to refer the matter to the ethics committee, which the House promptly voted unanimously to do.
The news of Foley's resignation overshadowed an afternoon Republican ceremony hailing a military commissions bill, and it gave Democrats sudden hopes of winning the Palm Beach-based 16th District. Many lawmakers think Democrats are on the verge of winning control of the House in November, and an unexpected gain could prove crucial.
What a whore!
Wow, what a thread.
I didnt realize there was this whole low convexity problem with jumbos. Still it seems that Tanta provided the solution in the opening: separate pools.
Price Stout: good arguments. Youve convinced me that raising CLLs for GSEs wont be an immediate threat to the taxpayer. I still dont like the idea, though, and certainly not the limit proposed ($725k), because I dont think its necessary.
I also had a good laugh with the less than sign fiasco since it bit me about two days ago.
ray, Dumbos was priceless.
Misean, I understand what youre saying about jumbos, having lived in CA for decades, but Id rather see prices fall than CLLs raised. Id also rather see mortgage interest deductions limits lowered, too.
risk capital, I dont think the NY case against Countrywides co-conspirators will get very far in view of the recent Supreme Court case involving Charter Communications and the denial of hearing in the last Enron case. The current court is inclined to shield from liability those who facilitated the fraud and leave liability only with the principals.
Does anyone else here think CR has become too successful? It takes forever to read and try to understand all that is writte
I think I should have said:
"I didnt realize there was this whole high convexity problem with jumbos."
Tanta, wake up and get back to work..LOL!
What about mortage substitutions in these GSE pools and trusts, any thought there??
Re: No Purchased
Loan permits the release or substitution of collateral if such release or
substitution (i) would create a "significant modification" of such Purchased
Loan within the meaning of Treas. Reg. ss. 1.1001 3 or (ii) would cause such
Purchased Loan not to be a "qualified mortgage" within the meaning of Section
860G(a)(3) of the Code (without regard to clause (A)(i) or (A)(ii) thereof).
Re: (vi) UCC Financing Statements for filing in each of the UCC Filing
Jurisdictions described on Exhibit XIII hereto, each naming Seller as "Debtor"
and Buyer as "Secured Party" and describing as "Collateral" all of the items set
forth in the definition of Collateral and Purchased Items in this Agreement,
together with any other documents necessary or requested by Buyer to perfect the
security interests granted by Seller in favor of Buyer under this Agreement or
any other Transaction Document;
(vii) any documents relating to any Hedging Transactions;
(viii) an opinion or opinions of outside counsel to Seller, substantially in
the form of Exhibit XIV;
Modifications of Commercial Mortgage Loans Held by a Real Estate
Mortgage Investment Conduit (REMIC)
AGENCY: Internal Revenue Service (IRS), Treasury.
http://regulations.justia.com/view/94569/
xcept that the REMIC may exchange a
defective loan for a ``qualified replacement mortgage'' for up to two
years.
Section 1.860G-2(b)(1) of the Income tax regulations (the
regulations) provides that, subject to certain exceptions described in
Sec. 1.860G-2(b)(3), if an obligation is significantly modified, then
the modified obligation is treated as one that was newly issued in
exchange for the unmodified obligation that it replaced.
What the friggn hell is this about?
Last?
The BOJ's final weapon against the slowdown in money velocity was quantitative easing.
Did Quantitative Easing by the Bank of Japan "Work" (2006-28, 10/20/2006)
Think it'll happen here?
can I have a comment stream minus "Anonymous" who appears to be obsessed with copy/paste?
I haven't read all the 245 comments above (yet) so please forgive me if this is a repetition.
Those who worked out the present terms for raising loan limits must have had an uneasy feeling that some of the 'advantages' would prove illusory. I suppose OFHEO anticipated this specific difficulty quickly enough, but how nice of SIMFA to deliver the cold dose of reality. Or did Mr. Lockhart comment the same already?
For an alternative LFKAJ (which I like), maybe 'pernicious pachyderm'. You could shorten it to an acronym, but I wouldn't want responsibility for the result.
From a second farewell tour, I remain yours, etc.,
French Police Search Societe Generale
Expired
I think the politicians and the Fed are finally starting to understand that our ponzi-scheme hollowed out shell of an economy collapses as the housing market implodes. Pretty sad, that a 10% drop in house prices can wipe the economy out.
All the levers in our economy are connected to house prices spiraling to the moon. Pretty stable system, dontcha think?
So, dubya and Paulson, in their trembling lying voices, may say the economy is strong. Some would point out that it's best not to listen to what they say but pay attention to what they do. Massive programs to salvage the economy LOL!
Why has Ben been slashing rates so furiously? Has it helped?
It's a good thing we still have a military. We're going to need it, here, to maintain order.
Isn't the risk of these higher loans already priced into the conforming adds for high LTV and low credit score?
That's (an attempt to) price the credit risk.
The thing is, a very high-FICO low-LTV jumbo will, all other things being equal, exhibit very fast prepayment speeds in even modest periods of rate declines. And actually, the more you load it up front with add-ons, the higher its rate relative to current market, therefore the more likely it will want to refi at earliest opportunity. (See the old "2/28" logic for an extreme example of the same phenomenon.)
The fact is those LLPAs are fairly modest adjustments. That is so because there isn't supposed to be such a wide range of credit quality that huge adjustments would be necessary. But the end of it is that this additional yield goes to the GSE, which is guaranteeing the credit losses, not to the end investor, who doesn't have any credit risk in a GSE pool. The end investor cares about default only to the extent that it's a prepayment to the investor (no different from a refi--the investor always gets 100% of outstanding principal back and the GSE eats the difference).
So basically, high-quality jumbos just don't default and create credit losses very often. They just refinance out of your pool and 1) therefore lower your yield while 2) leaving the remaining pool with seriously lowered average credit quality. That second problem is certainly exacerbated if you have a handful of very large (fast prepaying) jumbos in with a bunch of average-sized conforming loans (around $230K). The handful of jumbos that are prepaying could be half of your pool, by balance. And in a pass-through pool, you earn your coupon on the outstanding balance. You don't get some guaranteed yield.
At the level we're talking here, we're pricing pools, not individual loans. So you have to use some sort of model to project prepayments, unless you want to pay too much for the security, which nobody exactly does.
I know some people have a hard time analytically separating credit risk and interest rate risk, but that is how mortgages are priced.
This is all very different from pricing those weirdo Alt-A and subprime RMBS and ABS. Those aren't priced "TBA."
GSE loans are, exactly, the "commodities" of the mortgage market. That's the beauty of the GSE business model: it spits out cookie-cutter loans, that can be modeled acceptably for prepayment risk, and that therefore bond buyers are willing to trade TBA. Remember that they're guaranteed: that's what the GSEs do. So the buyer isn't buying credit risk. The buyer is buying interest rate risk (or trying not to).
It's an election year and HOV, TOL, LEN, KBH... are all idle and staring at the deep abyss. Politicains could get their own helicopters warmed up...
"A chicken in every pot and a McMansion on every lot"
boy, it really seems like people would be interested in an UberNerd on convexity! just sayin'...
Paulson's bags under his eyes are getting as big as conjure's bag. Methinks he is really really worried.
So the meltdown will involve severe deflation, since money won't get spent, and the velocity slows and slooowwwssss?
And the idiots cited above are still talking in terms of avoiding recession. Snort, snort, sobbb.
Oh, and I love the boytoy thing, except for the assumption that 42 or 44 is old for a woman.
Tanta So basically, high-quality jumbos just don't default and create credit losses very often. They just refinance out of your pool and 1) therefore lower your yield while 2) leaving the remaining pool with seriously lowered average credit quality.
Amen to that. This is such a different line of business that new models will need to be developed. Since, in particular, Fannie didn't show a great performance in risk-modeling its "innovative" products introduced to keep market share, it's not that clear that it has the expertise to do this.
If you pool just jumbos, you'll need to get into a lot of them, and you'll need different models, and the traders are going to have to go along.
But I'm with Tanta. How would GSE-backed jumbo pools be all that much differently priced than the stuff already out there? They are going to be geographically segregated, just as they are now, so you get the higher area risk. The only way they can be priced much lower than current jumbos is if essentially GSE's accept higher credit risk at a lower rate than other entities would, and in that case it does threaten the future of the GSE's.
Even from the point of view of portfolio lending, you would group jumbos in a different class for projecting both rate risk and credit risk. The additional credit risk comes because there is a higher sorting effect if rates drop, which is why Thornburg offered refis on a dime to try to prevent that from occurring.
Even in the current environment, Fannie has gone to streamlined financing to try to deal with the refi sorting issue.
The thing is, GSE pooling is designed to work with a relatively stable market, and jumbos just aren't as stable. You need to react more quickly on pricing and rate risk.
Lawyerliz,
If I interpret mp's references correctly, the meltdown more specifically is an interlocking cascade of counterparty failure in the OTC derivatives market.
The numbers for outstanding contracts are staggering, in the double or triple digit trillions depending on the market discussed. IF everyone pays as contracted then net exposures are much, much lower (but still big numbers). However, if one counterparty comes up short, then the other party suddenly has an unhedged exposure, and quite possibly short the cash to meet their obligatoin...rinse and repeat. This would be the point at which the deleveraging underway becomes 'disorderly.'
The liquidity trap is a different concept, viz:
Liquidity trap
In monetary economics, a liquidity trap occurs when the economy is stagnant, the nominal interest rate is close or equal to zero, and the monetary authority is unable to stimulate the economy with traditional monetary policy tools. In this kind of situation, people do not expect high returns on physical or financial investments, so they keep assets in short-term cash bank accounts or hoards rather than making long-term investments. This makes the recession even more severe, and can contribute to deflation.
[snip]
" Last?
Anonymous | 01.26.08 - 3:30 am "
Please.
The thing is, GSE pooling is designed to work with a relatively stable market, and jumbos just aren't as stable.
I think I'd phrase that differently.
GSE pooling is designed to create a relatively stable market. The more it works the more it works.
There is a price to be paid for that stability: no outliers allowed. FICOs just too low? Then it's subprime, and relegated to the "unstable" suprime market. Balance too big? Then it's jumbo and relegated to the "unstable" jumbo market. Documentation too goofy? Then it's "Alt-A" and relegated to the "unstable" Alt-A market. And so on.
What underlies this plan to raise the conforming limits is, I think, just another variation on the old desire for a free lunch. Of course the GSEs exist--it says so right in their charters--to "stabilize" the mortgage market. They accomplish that by stabilizing only that segment of the market that can be stabilized. They do not possess any magic spoofy-dust they can sprinkle on bubbly jumbo markets that makes them manageable.
This is what Lockhart is saying: if you want the GSEs to "tame" the jumbo market, then you have to let them tame it. Meaning, you have to let them "commodify" these loans. (Make them "jumbo lite," as Brian says.)
The trouble you run into here is that, absent a bubble market, jumbos are "boutique" business, not commodity business. The only reason we care right now about jumbo market liquidity and pricing is because there is (apparently) a "commodity jumbo" market in disarray. Well, ding dong. It's in disarray because it's a contradiction in terms. What's an "average above average loan" when it's at home?
The answer seems to be that a "jumbo jumbo" is one that the borrower can actually afford, and an "average jumbo" is one the borrower can't, actually, afford without some subsidy from non-jumbo borrowers.
Is anyone else old enough to remember the old old Saturday Night Live skit with the CHEESEBURGER-PEPSI-CHIPS! restaurant? That's what this reminds me of.
Is anyone else old enough to remember the old old Saturday Night Live skit with the CHEESEBURGER-PEPSI-CHIPS! restaurant?
uh, youtube link, please?
...typing "CHEESEBURGER-PEPSI-CHIPS!" into youtube gets you nowhere.
Is anyone else old enough to remember the Saturday Night Live skit -- CHEESEBURGER-CHEESEBURGER-CHEESEBURGER
John Belushi riffing on his family's diner, if I recall correctly.
god, you guys are no help at all. hey! let's make obscure old people references and then ignore bacon dreamz! i'm going to play with my new beach-ball. harumph.
Tanta,
Thanks for your explanation to my question. You're right that I wasn't thinking about that risk.
Let me follow up with how have limit increases been priced in the past. If I recall correctly, the last conforming increase capped loans at $417,000 from $366,000. Was there additional interest rate risk then? If so, how was that passed on to the consumer?
I know the limit being proposed now is some 200k higher than the existing limit, but there should be some lessons from the past that can be applied today.
bacon --
We're not ignoring you -- it was a famous John Belushi sketch from way back when.
belushi cheeseburger - Google Search
^^^^^^^^^^^^^
mp,
It is a classic liquidity trap. The market b-slapped Bernanke into place in less then 24 hours. The smart money is gone, as soon as the few greedy nimrods left get fleeced there will be no money to be had at all.
Hopefully the system is forced to reset before any of these idiotic entitlement schemes for ho'moaners go into effect.
Why do we need to raise loan limits to $730K from $308K in 2003 more than 100% in 5 years if inflation has been held in check at 2%/yr?
Somehow this doesn't seem to reconcile. Housing is the single biggest expense for US consumers. I wonder if this raises questions about our government's inflation readings.
This may eventually blow a big hole into the flank of "the artist formerly known as Wall Street"
SEC to Rework Rules After Funds Struggled With Subprime Prices - Bloomberg.com
igel-
funny, after reading 100 of the comments and not seeing the question i wanted to ask, i jumped to the bottom of all 250+ comments to ask it - and lo and behold - you just did -
so tanta, when the conforming limit was increased to $417k, was there an concomitant increase in rate/risk then as well? if i remember spreads had been collapsing no?
Let me follow up with how have limit increases been priced in the past. If I recall correctly, the last conforming increase capped loans at $417,000 from $366,000. Was there additional interest rate risk then? If so, how was that passed on to the consumer?
Well, you know, the increase you're talking about was 2005. That was rather unusual, historically speaking. Here's the historical table:
https://www.efanniemae.com/sf/refmaterials/loanlimits/pdf/historicalloanlimits.pdf
Remember that the formula that changes these limits is basically just applying the annual change in national average home prices. So the average price goes up, the conforming limit goes up.
The reason it hasn't increased for this year is that the average went down (but there is no explicit provision in the law to reduce the limit, only to increase it).
That is why it does, actually, take Congressional action to raise the limit above the formula results. Because the provision for using that formula is a matter of federal statute.
By definition the current proposal is to increase the limit well over the national average sales price, not to "keep up" with it. As it is, the $417K limit is now rather higher than it "should be." As prices drop it would eventually get more out of whack even if you left it at $417K. Upping it to $700K in one swell foop has enormous impacts.
tanta, do you think this proposal is DOA?
so tanta, when the conforming limit was increased to $417k, was there an concomitant increase in rate/risk then as well? if i remember spreads had been collapsing no?
Again, to clarify: prepayment behavior changes with the rate cycle. Obviously. Take a homogeneous pool of loans, project out a rate cycle (up or down), get a prepayment prediction, price it.
Take a non-homogeneous pool of loans, project out a rate cycle, get a whacky prepayment prediction.
There is nothing magic about the level of the conforming limit as long as it is based on this "averaging" thingy. When rates drop by very large increments, everybody refis.
When rates drop by smaller increments, the bigger loans refi. The smaller loans will frequently just sit there, because a .125 drop in the rate doesn't generate enough dollars per month to matter on the smaller loans. And yes, the question of how meaningful those dollars are is a matter of incomes and inflation and so on. And the conforming limit is just supposed to be keeping up with inflation, more or less (home price inflation, not general inflation, but sans bubble the two aren't supposed to be that out of alignment).
We've had lots of questioning of why these special accommodations should be made for California when the flyover states aren't affected by this mess...
Just reminding everyone that CA makes up something like 17% of the country's GDP and if there is a meltdown here it's going to cause the deepest recession, if not depression, we've seen in our lifetimes.
In California, we have two senators, just like Montana, a state that has 1/50th of the people. That lack of proper representation has manifested itself in fiscal and policy imbalances.
Over the last decade, California has paid hundreds of billions more in taxes than it has received in services from the federal government. That surplus turns into subsidies for many of the "flyover" states.
This is everyone's reckoning. Accept it.
The math on this thing at pool level is pretty complex, which is why I keep avoiding getting into it. But you can get a handle on the issue here just by asking yourself:
Would you refi to save $20 a month?
Would you refi to save $200 a month?
This is not just a matter of the new interest rate. It's a matter of how big your loan is. I can remember being totally blown away when I first encountered auto loan refis. (My credit union sent out some solicitation.) Sure, I could have reduced my rate by quite a bit, but given the low balance of my car loan, it still wouldn't have saved me much compared to fees & hassle. I'd have reacted differently if I had a much newer car loan with a much bigger balance.
And just one more thing:
We are talking specifically about TBA pricing. TBA means you are not looking at a pool of specific loans. You are agreeing to a forward trade where you will buy a pool backed by loans not yet originated. You do this because you have a promise that they will, um, "conform" to the established rules.
So it's not that TBA trades would just end if we re-defined "conforming" today. But there would be new rules, therefore new prepayment expectations. The problem is that the new expectation would have to be that you risk getting a very "lumpy" pool. You might therefore require a different spread than you would have on the old granular pools.
They'd have to be "lumpy." By definition. The proposal is, basically, to move the boundaries out to include more of the "tails" at the high end of a distribution curve. The only way that this won't result in "lumps" is if it does, in fact, reflate the housing bubble and drive the median or mean price back up.
jmay, I beg to differ. There is no reason the rest of the nation has to support artificially inflated CA house prices. You need to embrace house price deflation.
Accept it.
jmay
17% of GDP based on fictitious values, we will see what the real % is adjusted to market.
As a CA renter, I 100% accept and embrace California house price deflation.
However, in my short time of being out here for 3 years I know there are plenty of greedy whatever-somethings who will fight, complain, bitch, and moan about their house losing money.
When it happens, it won't be pretty. I don't know how it can't happen either.
Tanta - yes, I think using the word "uniform" instead of "stable" would be better. But the performance over time for jumbo loans is not stable. They move on different curves than conformings.
The way especially Fannie has operated is that it is in a well-spread, high demand segment for most of its conforming pools. It has a lot of data to work with, and so does everyone else for this segment.
By definition, adding a hunk that will be much more segmented in geographic distribution alone messes up the models, not to mention the refi issue.
I think the refi issue is huge. Jumbos mortgages act more like jumbo CDs - they are hot money that moves quickly on small rate changes. The way you project them out, whether on portfolio or pool, is different.
Thank you for all your hard work trying to explain the real issues, Tanta. It's not that I oppose people getting the best rates that the market can give them - it's just that I think a problem relating to a failure to assess risk cannot be addressed by continuing to ignore risk.
Mortgage rates are highly affected by future expectations. The reason why jumbo rates are high now has to do with future expectations of lower rates and quicker payouts for those who can qualify, plus rapid loss of credit/collateral quality on the remaining pool. In that way, jumbo pools might well end up with an ugly residual after a few years that is acting more like subprime than prime.
Since, in particular, Fannie didn't show a great performance in risk-modeling its "innovative" products introduced to keep market share, it's not that clear that it has the expertise to do this.
In fairness to Fannie, pretty much no one showed any ability to risk-model the "innovative" products. Not the rating agencies, not the large originators and not the end investors.
It's awfully hard to model when you have no historical performance data and meanwhile HPA is 10+%/yr. The modelers basically said "beats me." The models continued to model on the "normal" characteristics b/c many of the "innovative" ones weren't even variables in the model (great, and true, example: S&P LEVELs model treated an 80% first with 20% down payment the same as an 80 w/ 20 piggyback for many months. This is why even the Moody's CEO has acknowledged they didn't do a very good job.) Home prices kept sky rocketing and so the "production" guys put their foot on the gas.
When the models produced garbage answers because they weren't calibrated based on any kind of relevant data set, that's when actual PEOPLE are supposed to step in with their actual HUMAN JUDGMENT and override the modeled answer. Sadly, most of those actual people with actual judgment are "too old" or "too expensive" or "too pessimistic" or "not entrepreneurial enough" and have been replaced almost everywhere with 28-yr old MBAs who don't know anything.
Wow, that was mostly off topic! Sorry.
The answer seems to be that a "jumbo jumbo" is one that the borrower can actually afford, and an "average jumbo" is one the borrower can't, actually, afford without some subsidy from non-jumbo borrowers.
now this is why I love this site. you say in 30 words what I would fail to say in 500, and you're funny to boot. Except that I still think you're point is a bit of form over substance, since the substance will be that the "average jumbo" in your parlance will not in reality be GSE eligible.
It's too nice a day out, so I'm off to play in the sun!
Except that I still think you're point is a bit of form over substance, since the substance will be that the "average jumbo" in your parlance will not in reality be GSE eligible.
I pretty much agree with you there. (I don't entirely rule out the possibility of some idiot coming up with a "Flex Jumbo.")
But that's why this bugs me so much. The borrowers who (arguably) "need" a 30-year fixed refi at 5.5% won't get it. The borrowers who could probably be counted on to spend the monthly cost savings out of a LFKAJ refi on stuff--economic stimulus--won't get it either. Rich folks who owe $600K on a $1.2MM property will pick up a cheap refi and do no "stimulus" spending.
Meanwhile, the GSEs will have put a bunch of wasted effort into re-writing their guidelines and AUS and pooling models in order to buy these four or five loans they're going to get.
But that's nothing compared to what this is going to do to FHA. If you want to be cynical, that's what I think this is all in aid of. Nobody is dumb enough to propose making the FHA limit higher than the conforming limit. So in order to get all those subprime borrowers into FHA, we have to jack up conforming in order to jack up FHA. Fannie and Freddie will get a couple of probably harmless jumbos and FHA will get a boatload of waaaay too big 97% loans.
But that's nothing compared to what this is going to do to FHA. If you want to be cynical, that's what I think this is all in aid of. Nobody is dumb enough to propose making the FHA limit higher than the conforming limit. So in order to get all those subprime borrowers into FHA, we have to jack up conforming in order to jack up FHA. Fannie and Freddie will get a couple of probably harmless jumbos and FHA will get a boatload of waaaay too big 97% loans.
Tanta
Ahhh, these tricky buggers - in that case does the second aspect from the original article come into play - to wit:
Wall Street MBS traders last beat down SIFMA's door in October when the advent of the Federal Housing Administration's FHA Secure program threatened to taint TBA pools of Ginnie Mae securities. The dealers got their way -- Ginnie Mae created new "specified" pools outside of their TBA issues for FHA Secure.
As per the Ginnie Mae website, I read that :
"What Ginnie Mae does is guarantee investors the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans mainly loans insured by the Federal Housing Administration (FHA) or ..."
So:
Private banks originate loans that are insured by FHA - they then securitize them ( some, many, all ? ) and these securities get a guarantee from Ginnie Mae. And if the FHA Secure model is anything to go by, Ginnie Mae will have to create the same for jubprime FHA insured loans ?
But the central point I guess that's dawning on me is that Ginnie Mae guarantees and FHA insurance IS backed by the govt, not even implied, actually IS backed - so the taxpayer is on the hook ! Shiiitttt. The buggers are trying to do an end run on us.
-K
FHA will get a boatload of waaaay too big 97% loans.
good point. I agree.
bacon dreamz,
Tanta's reference to the cheesborger skits made a lot of sense to me in understanding what she was saying about the GSE pools.
This is what they offer. It doesn't vary. By implication, it shouldn't be varied now.
The mid to late 70's was long before 'have it your way,' but the gist was simple and the skit was repeated with different guest hosts:
"Coke." "No Coke - Pepsi."
"Can I have fries with that?" "No fries - cheeps."
Not everything in our collective memory can be found on youtube, but I do hope you get to watch some of those old skits along the way.
You still have to have appraisals. The property still has to be worth at least the loan amount. In bubble areas this isn't true now and won't be for years and years.
Stop foreclosure (costing about 50,000 each to borrower, lender, and The Society total estimated loss 150,000 each foreclosure) which is destroying economy and welfare of people; Use technology to reduce costs & interest rates and let market forces with help of Govt thru FHA, Fannie Mae, Freddie Mac, minimize regulations, who basically cover risks and arrange financing and arrange interest rates of below 5 percent in line with Treasury Rate, Fed Rate and charge risk based insurance from poor credit and thus make mortgage affordable to all. And property values will stabilize Estimated national loss due to foreclosures for 8 million homes @ 150,00 each is 1 (One) trillion dolla