He says USA is in recession since Dec. 2007 and Bush says there is no recession.... wich way will Congress swing??? GBW is a CEO President with a MBA form harvard or yale...(sorry about my lack of detail here)..
"We have a strong dollar policy" really means: cut rates in the face of a weakening dollar as it sets new records lows.
"We don't forcast a recession", But we'll keep cutting cause the recession will handle inflation.
"Inflation expectations are well anchored" which is why gold is over 900, Oil is over 100$ and the core is above our comfort level.
"The risk of a slowdown outways the risk of inflation", We know there is no chance that we will get back to growth trend in the second half of 08 or we wouldn't be cutting today. The fact that we are not even one bit concerned about inflation means we know that deflation is on the horizon. If we really believed growth would return in 6 months would we really be cutting today (for an effect 6-9 months out)?
I'm a bear, but jeezus, Roubini is all claws, teeth, and fur.
At least he didn't start speculating too much about the social dislocations that would occur from his scenario. I suspect crime rates would be inverse to housing prices.
The risk that a systemic financial meltdown in this most complex black box financial system that has run amok will cause a black swan event with destructive real economic and financial consequences is rising. And I thought Tsunamis were scary. From Roubini's Testimony
Short term CALL options play, but...
1) PMs track pretty well with oil.
2) PM stocks still move in sympathy with the broader markets, and those markets are in a sucker's rally.
3) Dollar diving.
4) Rate cuts dead ahead.
I expect to trade some of them for (non-mining) PUTs within the coming weeks.
The term "black swan' is thrown around way too much IMO. It is supposed to be an unpredicted and unpredicatble event. The idea that lending money to deadbeats to buy overpriced RE would come back to bite the lenders was both predictable and predicted.
Note also that "black swans" can be positive as well as negative.
The idea that lending money to deadbeats to buy overpriced RE would come back to bite the lenders was both predictable and predicted.
Roubini is talking about a historic financial meltdown-by Calculated Risk. The way he puts it: Assuming a 15% total price decline, and a 50% average loss per mortgage, the losses for lenders and investors would be about $1 trillion. Assuming a 30% price decline, the losses would be over $2 trillion. Not every upside down homeowner will use jingle mail, but if prices drop 30%, the losses for the lenders and investors might well be over $1 trillion (far in excess of the $70 to $80 billion in losses reported so far). Thats the Black Swan and thats alot of Dead Beats.
" Black Swan".. euphism for we couldnt predict....we didnt know...who could have guessed...
You could come up with better one if you watch 60s reruns of Marvel comic movies...
Man, i predict a huge comeback of COMMON SENSE soon... do i get a pay rise for this??
Black Swans also include the "highly improbable"; those events that supposedly only occur once in a zillion years but just happen to show up now. OOPS!
If prices drop 15%, why would mortgage losses be 50%? Even at 100% LTV, wouldn't the mortgage loss be 15%?
Plus, what about all the people who bought years ago? If my house dropped 15% from its peak (so far my area has not dropped at all according to OFHEO), it would not affect my lender in the slightest because I would continue to pay on my mortgage just like I have for 12 years.
I thought reported write-offs were already around $150 billion. Don't forget to count foreign banks also.
"Assuming a 15% total price decline, and a 50% average loss per mortgage, the losses for lenders and investors would be about $1 trillion. Assuming a 30% price decline, the losses would be over $2 trillion."
So let me get this straight, you lend money to someone at 80% LTV. The asset declines 15% so is now at 94% LTV. Then because there is still equity in the house the borrower sends jingle mail because he is a friend of Roubini and wants to prop up his thesis. Then the property goes REO and even though its value is a few percent above the loan the lender takes a 50% loss because well, they too like Roubini. And this happens 10 million times because its a fad.
AHOC:
Perhaps we are calculating in some sort of non-euclidean geometry where the three angles of a triangle do not add up to 180 degrees.
The really scary part of all this is that probably half the members of congress aren't capable of doing the 4th grade math that is required to do a back of the envelope check.
tj & the bear writes:
Black Swans also include the "highly improbable"; those events that supposedly only occur once in a zillion years but just happen to show up now. OOPS!
so we are basicly just at the wrong time in the wrong place??
i thing i need Pangalactic Thunder Gurgler... with 2 straws i want to share...
And was September 11 really a Black Swan? There was the Philippine plot to hijack 12 planes and fly them into buildings in the US that was stopped because Ramzi Youssef decided to cook explosives on his stove in his Manila apartment (maybe if he'd bought a house, the plot would have worked). There was also an Algerian group in 1996 who hijacked a plane in France and wanted to crash it into the Eiffel Tower. They were foiled when the pilot said he needed fuel and landed.
mjc--
From what I know of testimony before Congress, Roubini probably had very little time to prepare. Hence there are a lot of typos scattered throughout this report.
Ahead: We were talking about deadbeats not people who have been paying their mortgage for 12 years and have equity. From Roubini: What is the size of these losses for financial institutions and investors? Again this is a complex estimate as it depends on how large in the fall in home prices and the recovery rate given default and foreclosure. So the 15% drop in home prices could represents a 50% loss on the mortage value when you factor in the cost of foreclosure, selling into a soft market, opportunity cost of the dead money, property taxes,lawyers and what ever else the banks spend money on.
I read the text of Roubini's testimony, am still feeling "shock and awe." Awe because it was all spelled out so accurately, right here on this blog, of which I am proud to be a reader/subscriber. Shock because I still don't think the true tsunami warning is being grasped. Even though it is frighteningly clear and obvious. Maybe it doesn't matter, because there is nothing anyone could or should to do prevent it?
It's not just the high LTV borrowers who are upside down. Anyone who bought at the peak in a bubble area with a 20% downpayment is now upside down also. In some rapidly declining areas, there has already been a 30% drop in house prices. Prices will be down over 50% from peak in these areas (such as where I live) by the time we reach that bottom.
bigchubasco-A 15% fall in prices means, by definition, that the market is soft and you lose 15% if you sell. Let's say a bank was dumb enough to lend someone 600K to buy a house for 600K (I know many were that dumb). Now the house is worth $500K and the buyer wants to walk. Are you seriously arguing that all that other stuff will cost $200K? If that is the case, then why doesn't the lender simply re-write the mortgage down to $500K and have the owner stay in the house?
Look, losses are bad enough without economists (who Taleb says are incapable of predicting, which I agree with) trying to over-predict.
Aheadofthecurve...say the house is now worth 500k. Add in the attorney's fees, cost of filings, and bank work. Let the house sit on the market for a year. If the owner files for BK, it stops the foreclosure process and that can take a year to discharge. Then the filings start again. More attorney's fees. Auction fees. End sale. How much do you think the bank is going to get in the end for the now distressed property? How much could that money have earned elsewhere if put to work?
I think that is where these estimates are coming from. And I think the point about just writing down the loan is, what do you write it down to and how?
Ahead: If you go to Markit.com and check out the ABX indices you will find bundles of mortgages and helocs that are selling for alot less than a 50% discount. Today was a very bad day for the ABX.Indices as you can see for yourself if you go there. The banks that own markit never thought that the joe sixpacks of the world could check out what this toxic waste is really worth when they created the site. Anyway, I'm just spouting off. Cheers
The feds are going to force you to reveal your identities when you are brought before Congress to testify on the housing market. Beat them to the punch. Who are you? I must know.
"why doesn't the lender simply re-write the mortgage down to $500K and have the owner stay in the house?"
I would like to know a knowledgable expert's opinion on this, but from my perspective what the lender would be saying is "I wrote a bad 100% LTV loan. I'll rip that one up and write another bad 100% LTV loan."
To me they'd be wiser to foreclose, auction the property, and be done with the bad risk once and for all.
Aheadofthecurve writes:
And was September 11 really a Black Swan? There was the Philippine plot to hijack 12 planes and fly them into buildings in the US that was stopped because Ramzi Youssef decided to cook explosives on his stove in his Manila apartment (maybe if he'd bought a house, the plot would have worked). There was also an Algerian group in 1996 who hijacked a plane in France and wanted to crash it into the Eiffel Tower. They were foiled when the pilot said he needed fuel and landed.
No, there were warnings of Septemeber 11.
if you are at it: anyone seen!!! any evidence yet of Osama bin laden involved in it? Anyone Prosecuted yet of it?? just saying...
Isn't part of the problem is that the mortgage of the home that's lost $100,000 in value can't just be "written down" by the bank because the mortgage has been securitized into a pool (w/tranches)? There's probably (no, definitely) information and/or data in Tanta's posts I don't understand completely, but she does seem to be saying that some of the plans that seem to be proposed (most recently, by Barney Frank) don't take into account the requirements (or rules governing) the entities that so many of these mortgages have been packaged into. It would seem that you're not just talking about a bank, you're talking about a bunch of investors, a servicer, etc.
Probably I'm oversimplifying--but it seems to me that saying, why doesn't the lender just write it down, doesn't deal with the realities of "structured finance."
I just read that whole document and my head is about to explode. No surprises for the bears, but there is no way J6P can process that much information.
And almost certainly the first time they have heard the phrase "Jingle Mail Tsunami".
ROTFL... until I contemplate the consequences. Bartender, those Pangalatic Gargleblasters seem to be the trick...
Bigchubasco said: and check out the ABX indices
"Eleven cents on the dollar! Why don't you just reprice? But, We go to Eleven!" (My apologies to Spinal Tap).
Got Popcorn?
Neil
Damn CR & Tanta - you are now in the congressional record! Preserved forever. In 2078, and 2148 when there are new housing bubbles of epic proportions they will be quoting you as ancient history.
Maybe to save the people in the future, we should open a bank account with $1000.00 in it, and by the time of the next housing bubble the account will have enough to bail out the whole mess?
Ahead of the curve wrote:
1. If prices drop 15%, why would mortgage losses be 50%? Even at 100% LTV, wouldn't the mortgage loss be 15%?
Plus, what about all the people who bought years ago? If my house dropped 15% from its peak (so far my area has not dropped at all according to OFHEO), it would not affect my lender in the slightest because I would continue to pay on my mortgage just like I have for 12 years.
Lets say we lose 20% of average national home prices. 20 is easier to do math, I'll illustrate how we get a higher mtg % loss, with only 20% average home price decrease.
Even if we ignore leverage effect. This is how 20% can magnify:
a. The "20" in 80/20 loses 100% of their values. Other junior liens can be wiped out in a foreclosure, resulting in 100% loss for them. If there's a HELOC, Primary and Secondary at the same time, not every lender will recover their loss at an auction.
c. Properties in expensive areas lose more than 20% -- so that we can get a NATIONAL home price average loss of "only" 20%. Don't forget there are areas in the country with prices that are not moving or even going slightly up. Recent reports have some small pockets even have price increase of up to 19%.
Look at it this way:
Assume USA only have 2 states, 1000 housing unit each:
BubbleState loses 39% in price, 1000K avg house.
NonBubbleState loses 1% in price, 100K avg house.
Average home price loss is 20%.
Mortgage amt loss:
1000K * 40% = 400K per house in BubbleState
100K * 1% = 1K per house in nonBubbleState
Total mortgage loss = 400 * 1000 + 1*1000 = 401000
Total mortgage value = 1100000K
Mtg loss = 401000/1100000 = about 40% loss!!!!
Even without leverage, just by virtue of losses skewed by regions with huge mortgage amounts, and home price loss being "averaged" throughout the rest of the country, I've shown you that mtg loss can be greater than average price loss.
2. I thought reported write-offs were already around $150 billion. Don't forget to count foreign banks also.
We're also talking continued piling up of mortgages that now can no longer be sold throughout 2007. You think banks stopped foolish lending in Jan 2007? or even June 2007? No! It was denial, denial... So bank's exposure is much higher than they're reporting.
One end financials are writing off, the other side they're still writing mtgs that cannot be sold. CRE, pier loans are also a great example here.
hc-I see what you are saying, though your example is a bit extreme. But even in bubble areas only a limited % of homeowners bought at or near the peak. All those who bought between 1960 and 2002 or 2003 will still be ahead of where they bought even if prices drop 20% from some arbitrary peak value in say 2005. You are certainly correct that there are other areas where there will be losses, though.
Aheadofthecurve writes:
hc-I see what you are saying, though your example is a bit extreme. But even in bubble areas only a limited % of homeowners bought at or near the peak. All those who bought between 1960 and 2002 or 2003 will still be ahead of where they bought even if prices drop 20% from some arbitrary peak value in say 2005. You are certainly correct that there are other areas where there will be losses, though.
but then you have to add that there are borrowed against there house too and spend the money.. i am right or do i miss something?? wasnt this part of the problem too??
"Some banks also are cutting back on their existing office space. Earlier this month, Citigroup Inc. quietly put on the market five floors of its 42-floor office tower in Canary Wharf. The company leases the space and is trying to sublet the empty floors, says spokesman Rob McIvor. He said the bank was able to open up the space after tightening staff seating plans. He said the empty floors aren't related to layoffs of fewer than 100 London staffers in recent months."
These idiots are so desperate for cash that they are cramming workers into considerably less space just so that they can sublease some property for some more cash.
david_in_ct writes:
AHOC:
And some people wonder why income is not distributed more evenly....
david_in_ct | 02.27.08 - 4:45 pm
David,
I guess that income distribution is not correlated with reading comprehension. Nice job on the obnoxious comment and previously incorrect analysis.
hc-I see what you are saying, though your example is a bit extreme. But even in bubble areas only a limited % of homeowners bought at or near the peak. All those who bought between 1960 and 2002 or 2003 will still be ahead of where they bought even if prices drop 20% from some arbitrary peak value in say 2005. You are certainly correct that there are other areas where there will be losses, though.
Aheadofthecurve | 02.27.08 - 5:43 pm
Not really a question of when they origionally bought if they did cash out refis or had big HELOC's. There was more than a fair amount of that going on. Durring the whole inflation of the bubble era, mortgage debt was rising as a percent of total market value of residential real estate. CR has posted that graph many times (although presented as % equity in houses). Currently total equity stands around 50%, lowest on record, and that included the 32% of homeowners who have had mortgage burning parties (mostly lil old ladies).
In a normal housing market, when the house is not upside down, it is common for a lender to lose 20-30% on a forclosure due to legal expenses, vandalism to the house, etc. Today, with the house likely already upside down, and the time period to get the house off the books even longer, 50% is very realistic.
FYI, I heard of one distant business aquaintance who recently paid $290K all cash for a home that sold in 2006 for $929K! That is 70% off...and does not even factor in lender carrying expenses, legal expenses, etc. By the way, the house was in the Brentwood area, near the Sac River Delta.
hc:
yes, because different localities can have different pricing patterns the average is not a clear indicator of distress.
I don't know if you have followed the discussion but I built a little simulation which took as its base price the case shiller us home index. I then split the US into 10 different indexes so as to get a dispersion about this mean. The strongest pricing index rose about 90basis points per month or about 11% per year over the index, and then declined by the same excess rate on the way down. extending the case shiller index out over another 20 months at a pricing decline rate of about 50 basis points a month gave me estimates of 18% of all mortgage holders upsidedown on the ir mortgage (mortgage > house price) with 9% underwater by 10% or more.
The model is very straightforward, but for the moment does not include helocs, but also does not include any principle payback. The point of the exercise was to get a decent ballpark for the amount of 'underwaterness' in the event of a 20% peak to trough decline in the case shiller index. So if the answer is that only about 9% of mortgage holders end up in a position of 10% or worse upside down, it seems beyond the pale to be forecasting jingle mail to the tune of 20 -40 of homeowners with mortgages.
I tried to post the code for the model so others could see what was done and they could poke holes in it but it does not want to post on haloscan. I would be happy to email it to anyone interested. Unfortunately you won't be able to run it because it requires a bunch of other software to make it actually work, but anyone who could program in c, basic or probably excel could duplicate the efforts.
JLR:
"Nice job on the obnoxious comment and previously incorrect analysis."
I have no problem being wrong. In fact I like it because then I learn something. If you could show me the error of my calculation I would be appreciative.
TIA
D
"Second, the problems of the economy are not just problems of illiquidity but rather more deep seated problems of insolvency; and monetary policy cannot resolve serious credit problems in the economy."
Question: do not the widening interest rate spreads and more conservative lending standards work as a re-capitalization of banks? And if so, doesn't this argue counter (to some degree) that solvency cannot be addressed or resolved by Fed monetary policy?
Much as I love Roubini's ability to stir the pot, what he does not acknowledge at the end of his post is that its not just the banks that hold all the mortgages....he really does not address the whole RMBS market, but that would most likely be too complex for Congress.
"Before you brainiacs continue with your misrepresentations, has it dawned on you yet that CR was saying that 50% x 15% = 7.5% of mortgage losses (= $1T), and 50% x 30% = 15% (= $2T) of mortgage losses?"
I get that 50% of 15% = 7.5%, however I don't know what these numbers are refer to. If you could explain what they are it would make it easy for me to respond.
thanks
d
Let's clear up "Black Swan".. per Wiki
""The term black swan comes from the ancient Western conception that all swans were white. In that context, a black swan was a metaphor for something that could not exist. The 17th Century discovery of black swans in Australia metamorphosed the term to connote that the perceived impossibility actually came to pass.""
Yes, I know.. Taleb's book cites 9/11 as a Black Swan, when it really wasn't.
In practice, the term seems to mean, "I couldn't figure out a way to put that data in my quant model'. Which is why CR and others predict, 'mild, shallow, recession'.
"Logically, not everyone will default. There aren't that many sub-prime loans. The effect of the defaults will be small. Deficits don't matter." You could support each of these cases, statistically.
So.... if it's not in your model, you can't see it. You can't predict it... Until "The Chicken of Depression" shows up on your doorstep.
"I just read that whole document and my head is about to explode. No surprises for the bears, but there is no way J6P can process that much information."
Oh I don't know. I read the whole thing as well, and it seems pretty clear to me.
Yossarian: I recently read the book. While I found Taleb to be a reasonably slick writer, to a large extent the message comes down to "some crazy sh*t happens and no-one can predict it." Since I was trained in an empirical science (biochemistry) and not economics or finance, I have never believed you can model any but the simplest of systems (bacterial growth is an example). So to a large extent I felt he was demolishing a straw man. But it seems enough people believe in that straw man to make the exercise useful.
In this credit debacle, the question comes down to did those peddling the garbage actually believe the models suggesting that you could have high yield and low risk at the same time or did they use the models as a smokescreen. I tend to believe the latter, but I can't prove it.
david_in_ct:
Using CR's numbers of $2T loss for 20M foreclosures (the 30% price decline case), the average loss is $100K. That would be 50% of the $200k average loan you mentioned. For 100% LTV, the pure loan loss would be $60k and the remaining $40k would be foreclosure processing etc.
That $100k average loss is not all that unreasonable, is it? CR meant the 50% to be an aveage, not a fixed amount for every case, esp for expensive houses.
Good grief.....with all the money Nouriel is raking in on his blog and consulting, could he please hire a copy editor? The man can hardly write English.
"Using CR's numbers of $2T loss for 20M foreclosures (the 30% price decline case), the average loss is $100K. That would be 50% of the $200k average loan you mentioned. For 100% LTV, the pure loan loss would be $60k and the remaining $40k would be foreclosure processing etc."
Here are the things that I see as being wrong with this calculation:
Average LTV is about 80% not 100%. This make a huge difference to both the number of people underwater and the losses.
2, There is an assumption above that every upside down borrower walks away even though that has never happened in the past and there have been plentiy of upside down people in other housing declines
If you actually build a model of home price distribution and mortgage distributions and take the average down 30% you get nowhere near 40% of the homes being under water.
Last year which was admittedly a pretty horrid year for housing saw about 250k foreclosures through to completion. Do you really think it is reasonable to postulate an 80x increase?
One thing you can be certain of, is that long long before you got anywhere near those kind of numbers the fed would simply monetize ALL the paper. Gold might go to 2000 and oil to 200 but that would end the foreclosures on the spot.
Most in finance, RE, tech are "true believers". They truly believe the crap they spew. That is why so many of them will crash and burn. They literally think what is happening was impossible, so they are leveraged (lifestyle wise) to the hilt. Live by the sword, die by the sword.
david in ct, I think your use of average LTV is leading you astray. Some locations were way overpriced at the peak of the bubble, and almost all the loans were 100% LTV or very close, and for enormous amounts of money per property. That 30% or whatever that get hit and walk are not spread evenly over the country.
Roubini links to the full hearing, which was pretty rich. The four witnesses go in order from least bearish (Alice Rivkin in a fabulous dowager outfit, claiming regulation couldn't have stopped the bubble) to Roubini, who took no prisoners. Roubini got most all the attention during followup questions. Looked like Barney Frank took it as a wakeup.
well the good news is, looks like CR was right.
Roubini before Congress? Hope they're wearing their Depends!!!
Something bout don't shoot the messenger.
though one :
He says USA is in recession since Dec. 2007 and Bush says there is no recession.... wich way will Congress swing??? GBW is a CEO President with a MBA form harvard or yale...(sorry about my lack of detail here)..
So there it is, the jingle mail nonsense has made it all the way to capital hill. who would've thunk it.
side note: couldnt all this foreclosed / jinglemail PPLjust move to a empty House and sit it out??
it will be summer soon...
just a thought...
Add site Note:
they could say they "adopt" this empty house??
"Gort! Klaatu barada nikto!"
is this from Indiana Jones???
wait "Army of Darkness" ???
how fitting..
I want Tanta and CR before Congress!!!!
(Congrats for the hat tip)
OT,
Fed Speak:
"We have a strong dollar policy" really means: cut rates in the face of a weakening dollar as it sets new records lows.
"We don't forcast a recession", But we'll keep cutting cause the recession will handle inflation.
"Inflation expectations are well anchored" which is why gold is over 900, Oil is over 100$ and the core is above our comfort level.
"The risk of a slowdown outways the risk of inflation", We know there is no chance that we will get back to growth trend in the second half of 08 or we wouldn't be cutting today. The fact that we are not even one bit concerned about inflation means we know that deflation is on the horizon. If we really believed growth would return in 6 months would we really be cutting today (for an effect 6-9 months out)?
"Gort! Klaatu barada nikto!"
Day the Earth Stood Still. Or a Ringo Starr album cover? Or that faux Beatle pop rock group?
I'm a bear, but jeezus, Roubini is all claws, teeth, and fur.
At least he didn't start speculating too much about the social dislocations that would occur from his scenario. I suspect crime rates would be inverse to housing prices.
Good stuff! (We'll the predicament isn't good...)
Congrats on the mention, CR.
Unfortunately, in the context, I think you will be taken off the list for the 2008 White House Christmas Party.
"Unfortunately, in the context, I think you will be taken off the list for the 2008 White House Christmas Party."
Ha hahahahahaaaa....
On a more predictable note:
S&P: Mortgage Bond Credit Worsens
Standard & Poor's Says Credit Quality for Most Loans Securing Mortgage Bonds Worsened
CNNMoney.com: 404 Page Not Found
Thank God the bears are still here. Their absence the last couple of days had me worried.
It's called pillow-talk baby!
*
Haha I bet if we tried hard enough you could make a draft of the entire credit/housing bubble out of nothing but Army of Darkness one-liners.
AOTC,
Would you believe I'm 99% long this market? All miners, though!
Ph'nglui mglw'nafh!
CR just got inducted into the Ancient and Hermetic Order of the Shrill. Cool.
LawStudent writes:
It's called pillow-talk baby!
*
Haha I bet if we tried hard enough you could make a draft of the entire credit/housing bubble out of nothing but Army of Darkness one-liners.
Imagine Greenspan:
" i may be bad ´but i feel good"...
well crying is to depressing so lets laugh..
CR might want to prepare for an invitation from Barney Frank to explain his math before Congress.
"Would you believe I'm 99% long this market? All miners, though!"
Now I'm worried
tj: Long the market going into a depression???
And why no oil? If you believe in peak oil (as I do and I believe you do) the oil in the ground has to become more valuable.
Who in Congress is awake enough to even know about Roubini?
Countrywide: You found me beautiful once
Market: honey, you got real ugly...
Quality is as Quality does, well done CR for the Roubini mention to Congress. Kudos for the excellent service.
bobn writes:
Who in Congress is awake enough to even know about Roubini?
was Bernie Sanders there??
i am sure he would...
Congrats, CR and Tanta on making it to the mainstream. The spooks must be trying to find out your identity now
another shortsale story...
$702k purchase px
$400k list
cfc 590... 70gmac....
SF way east bay
The risk that a systemic financial meltdown in this most complex black box financial system that has run amok will cause a black swan event with destructive real economic and financial consequences is rising. And I thought Tsunamis were scary. From Roubini's Testimony
AOTC,
Short term CALL options play, but...
1) PMs track pretty well with oil.
2) PM stocks still move in sympathy with the broader markets, and those markets are in a sucker's rally.
3) Dollar diving.
4) Rate cuts dead ahead.
I expect to trade some of them for (non-mining) PUTs within the coming weeks.
whats a black swan again?
The term "black swan' is thrown around way too much IMO. It is supposed to be an unpredicted and unpredicatble event. The idea that lending money to deadbeats to buy overpriced RE would come back to bite the lenders was both predictable and predicted.
Note also that "black swans" can be positive as well as negative.
Black swan theory - Wikipedia, the free encyclopedia
http://www.fooledbyrandomness.com/
Awesome book
I am amazed than none of those old hags came up with something like : "Mr Houdini I used to watch your shows...."
The idea that lending money to deadbeats to buy overpriced RE would come back to bite the lenders was both predictable and predicted.
Roubini is talking about a historic financial meltdown-by Calculated Risk. The way he puts it: Assuming a 15% total price decline, and a 50% average loss per mortgage, the losses for lenders and investors would be about $1 trillion. Assuming a 30% price decline, the losses would be over $2 trillion. Not every upside down homeowner will use jingle mail, but if prices drop 30%, the losses for the lenders and investors might well be over $1 trillion (far in excess of the $70 to $80 billion in losses reported so far). Thats the Black Swan and thats alot of Dead Beats.
" Black Swan".. euphism for we couldnt predict....we didnt know...who could have guessed...
You could come up with better one if you watch 60s reruns of Marvel comic movies...
Man, i predict a huge comeback of COMMON SENSE soon... do i get a pay rise for this??
Ulp. CNBC didn't talk about Roubini at all.
Ah well, if you read between Bernanke's frown lines, you are there.
Of course the market is back in happy mode.
Someday this war's gonna end...
Black Swans also include the "highly improbable"; those events that supposedly only occur once in a zillion years but just happen to show up now. OOPS!
bigchubasco-
Plus, what about all the people who bought years ago? If my house dropped 15% from its peak (so far my area has not dropped at all according to OFHEO), it would not affect my lender in the slightest because I would continue to pay on my mortgage just like I have for 12 years.
"Assuming a 15% total price decline, and a 50% average loss per mortgage, the losses for lenders and investors would be about $1 trillion. Assuming a 30% price decline, the losses would be over $2 trillion."
So let me get this straight, you lend money to someone at 80% LTV. The asset declines 15% so is now at 94% LTV. Then because there is still equity in the house the borrower sends jingle mail because he is a friend of Roubini and wants to prop up his thesis. Then the property goes REO and even though its value is a few percent above the loan the lender takes a 50% loss because well, they too like Roubini. And this happens 10 million times because its a fad.
Congrats CR!
Amen to this. I'm glad to see someone as pessimistic as I am.
Tanta or CR, I'd love to hear if/where you have disagreements with Roubini's conclusions.
(NINJA loans? That's one I hadn't heard before.)
AHOC:
Perhaps we are calculating in some sort of non-euclidean geometry where the three angles of a triangle do not add up to 180 degrees.
The really scary part of all this is that probably half the members of congress aren't capable of doing the 4th grade math that is required to do a back of the envelope check.
tj & the bear writes:
Black Swans also include the "highly improbable"; those events that supposedly only occur once in a zillion years but just happen to show up now. OOPS!
so we are basicly just at the wrong time in the wrong place??
i thing i need Pangalactic Thunder Gurgler... with 2 straws i want to share...
Odd that this mistake got into it:
It is not very likely that - as some forecasters now do this will be a mild two-quarter recession and that growth will recover in H2 of 2008
(The demon proofreader strikes again!)
david-And there is a presidential candidate who has won several states who believes the earth is 6,000 years old and evolution is a commie plot.
Yoringe,
Pangalactic Gargleblaster.
Cheers,
AHOC:
And some people wonder why income is not distributed more evenly....
sorry i just have the german version and trasnlated but cheers too
)
but if we are at it:
could be at the center of it a cup of tea??
and the fed is busy to read the used leaves who where left of it???
And was September 11 really a Black Swan? There was the Philippine plot to hijack 12 planes and fly them into buildings in the US that was stopped because Ramzi Youssef decided to cook explosives on his stove in his Manila apartment (maybe if he'd bought a house, the plot would have worked). There was also an Algerian group in 1996 who hijacked a plane in France and wanted to crash it into the Eiffel Tower. They were foiled when the pilot said he needed fuel and landed.
No, there were warnings of Septemeber 11.
mjc--
From what I know of testimony before Congress, Roubini probably had very little time to prepare. Hence there are a lot of typos scattered throughout this report.
I thought that I was pessimistic. His logic seems sound to me. Where did I bury that ammo?
Ahead: We were talking about deadbeats not people who have been paying their mortgage for 12 years and have equity. From Roubini: What is the size of these losses for financial institutions and investors? Again this is a complex estimate as it depends on how large in the fall in home prices and the recovery rate given default and foreclosure. So the 15% drop in home prices could represents a 50% loss on the mortage value when you factor in the cost of foreclosure, selling into a soft market, opportunity cost of the dead money, property taxes,lawyers and what ever else the banks spend money on.
Deflationary Jane thanks!
And AOTC and others!
That was great! Big ups, CR.
This must be the first time Barney Frank et al. have heard the phrase 'jingle mail' used 8 times in a single prepared statement.
And almost certainly the first time they have heard the phrase "Jingle Mail Tsunami".
I read the text of Roubini's testimony, am still feeling "shock and awe." Awe because it was all spelled out so accurately, right here on this blog, of which I am proud to be a reader/subscriber. Shock because I still don't think the true tsunami warning is being grasped. Even though it is frighteningly clear and obvious. Maybe it doesn't matter, because there is nothing anyone could or should to do prevent it?
It's not just the high LTV borrowers who are upside down. Anyone who bought at the peak in a bubble area with a 20% downpayment is now upside down also. In some rapidly declining areas, there has already been a 30% drop in house prices. Prices will be down over 50% from peak in these areas (such as where I live) by the time we reach that bottom.
Shnaps--
I like "bubbly peak" myself. Another first!
bigchubasco-A 15% fall in prices means, by definition, that the market is soft and you lose 15% if you sell. Let's say a bank was dumb enough to lend someone 600K to buy a house for 600K (I know many were that dumb). Now the house is worth $500K and the buyer wants to walk. Are you seriously arguing that all that other stuff will cost $200K? If that is the case, then why doesn't the lender simply re-write the mortgage down to $500K and have the owner stay in the house?
Look, losses are bad enough without economists (who Taleb says are incapable of predicting, which I agree with) trying to over-predict.
" why doesn't the lender simply re-write the mortgage down to $500K and have the owner stay in the house?"
Because the house is probably worth even less, and PITI, even at the Bernanke bargain basement rate, is much more than the "homeowner" can afford.
NINJA loans = that is a pejoritive term for NINA loans.
NINA = "No Income / No Asset" verification done.
NINJA = "No income, No Job or Assets" (or something like that.)
Aheadofthecurve...say the house is now worth 500k. Add in the attorney's fees, cost of filings, and bank work. Let the house sit on the market for a year. If the owner files for BK, it stops the foreclosure process and that can take a year to discharge. Then the filings start again. More attorney's fees. Auction fees. End sale. How much do you think the bank is going to get in the end for the now distressed property? How much could that money have earned elsewhere if put to work?
I think that is where these estimates are coming from. And I think the point about just writing down the loan is, what do you write it down to and how?
Ahead: If you go to Markit.com and check out the ABX indices you will find bundles of mortgages and helocs that are selling for alot less than a 50% discount. Today was a very bad day for the ABX.Indices as you can see for yourself if you go there. The banks that own markit never thought that the joe sixpacks of the world could check out what this toxic waste is really worth when they created the site. Anyway, I'm just spouting off. Cheers
mjc:
"...as some forecasters now do..."
Above is a turn of phrase, meaning, "as some forecasters now forecast," but in a more interesting way... Not a typo.
Brevis ipsa vita est sed malis fit longior - Our life is short but is made longer by misfortunes
CR and Tanta,
The feds are going to force you to reveal your identities when you are brought before Congress to testify on the housing market. Beat them to the punch. Who are you? I must know.
"why doesn't the lender simply re-write the mortgage down to $500K and have the owner stay in the house?"
I would like to know a knowledgable expert's opinion on this, but from my perspective what the lender would be saying is "I wrote a bad 100% LTV loan. I'll rip that one up and write another bad 100% LTV loan."
To me they'd be wiser to foreclose, auction the property, and be done with the bad risk once and for all.
Aheadofthecurve writes:
And was September 11 really a Black Swan? There was the Philippine plot to hijack 12 planes and fly them into buildings in the US that was stopped because Ramzi Youssef decided to cook explosives on his stove in his Manila apartment (maybe if he'd bought a house, the plot would have worked). There was also an Algerian group in 1996 who hijacked a plane in France and wanted to crash it into the Eiffel Tower. They were foiled when the pilot said he needed fuel and landed.
No, there were warnings of Septemeber 11.
if you are at it: anyone seen!!! any evidence yet of Osama bin laden involved in it? Anyone Prosecuted yet of it?? just saying...
AHOC,
Isn't part of the problem is that the mortgage of the home that's lost $100,000 in value can't just be "written down" by the bank because the mortgage has been securitized into a pool (w/tranches)? There's probably (no, definitely) information and/or data in Tanta's posts I don't understand completely, but she does seem to be saying that some of the plans that seem to be proposed (most recently, by Barney Frank) don't take into account the requirements (or rules governing) the entities that so many of these mortgages have been packaged into. It would seem that you're not just talking about a bank, you're talking about a bunch of investors, a servicer, etc.
Probably I'm oversimplifying--but it seems to me that saying, why doesn't the lender just write it down, doesn't deal with the realities of "structured finance."
Ahead: One more thought. I would'nt be suprised if the site gets shut down if this keeps up.
I just read that whole document and my head is about to explode. No surprises for the bears, but there is no way J6P can process that much information.
And almost certainly the first time they have heard the phrase "Jingle Mail Tsunami".
ROTFL... until I contemplate the consequences. Bartender, those Pangalatic Gargleblasters seem to be the trick...
Bigchubasco said:
and check out the ABX indices
"Eleven cents on the dollar! Why don't you just reprice? But, We go to Eleven!" (My apologies to Spinal Tap).
Got Popcorn?
Neil
Damn CR & Tanta - you are now in the congressional record! Preserved forever. In 2078, and 2148 when there are new housing bubbles of epic proportions they will be quoting you as ancient history.
Maybe to save the people in the future, we should open a bank account with $1000.00 in it, and by the time of the next housing bubble the account will have enough to bail out the whole mess?
"CR was saying that 50% x 15% = 7.5% of mortgage losses (= $1T), and 50% x 30% = 15% (= $2T) of mortgage losses?"
I'm sorry, I don't follow what these #s refer to.
Now you play dumb, eh?
Ahead of the curve wrote:
1. If prices drop 15%, why would mortgage losses be 50%? Even at 100% LTV, wouldn't the mortgage loss be 15%?
Plus, what about all the people who bought years ago? If my house dropped 15% from its peak (so far my area has not dropped at all according to OFHEO), it would not affect my lender in the slightest because I would continue to pay on my mortgage just like I have for 12 years.
Lets say we lose 20% of average national home prices. 20 is easier to do math, I'll illustrate how we get a higher mtg % loss, with only 20% average home price decrease.
Even if we ignore leverage effect. This is how 20% can magnify:
a. The "20" in 80/20 loses 100% of their values. Other junior liens can be wiped out in a foreclosure, resulting in 100% loss for them. If there's a HELOC, Primary and Secondary at the same time, not every lender will recover their loss at an auction.
c. Properties in expensive areas lose more than 20% -- so that we can get a NATIONAL home price average loss of "only" 20%. Don't forget there are areas in the country with prices that are not moving or even going slightly up. Recent reports have some small pockets even have price increase of up to 19%.
Look at it this way:
Assume USA only have 2 states, 1000 housing unit each:
BubbleState loses 39% in price, 1000K avg house.
NonBubbleState loses 1% in price, 100K avg house.
Average home price loss is 20%.
Mortgage amt loss:
1000K * 40% = 400K per house in BubbleState
100K * 1% = 1K per house in nonBubbleState
Total mortgage loss = 400 * 1000 + 1*1000 = 401000
Total mortgage value = 1100000K
Mtg loss = 401000/1100000 = about 40% loss!!!!
Even without leverage, just by virtue of losses skewed by regions with huge mortgage amounts, and home price loss being "averaged" throughout the rest of the country, I've shown you that mtg loss can be greater than average price loss.
2. I thought reported write-offs were already around $150 billion. Don't forget to count foreign banks also.
We're also talking continued piling up of mortgages that now can no longer be sold throughout 2007. You think banks stopped foolish lending in Jan 2007? or even June 2007? No! It was denial, denial... So bank's exposure is much higher than they're reporting.
One end financials are writing off, the other side they're still writing mtgs that cannot be sold. CRE, pier loans are also a great example here.
haha isnt this easy... find someone outside the US and set it up new...
CR, could you rectify these nonsense calculations, please?
bigchubasco writes:
Ahead: One more thought. I would'nt be suprised if the site gets shut down if this keeps up.
sorry forgot the post i replying too...
hc-I see what you are saying, though your example is a bit extreme. But even in bubble areas only a limited % of homeowners bought at or near the peak. All those who bought between 1960 and 2002 or 2003 will still be ahead of where they bought even if prices drop 20% from some arbitrary peak value in say 2005. You are certainly correct that there are other areas where there will be losses, though.
Aheadofthecurve writes:
hc-I see what you are saying, though your example is a bit extreme. But even in bubble areas only a limited % of homeowners bought at or near the peak. All those who bought between 1960 and 2002 or 2003 will still be ahead of where they bought even if prices drop 20% from some arbitrary peak value in say 2005. You are certainly correct that there are other areas where there will be losses, though.
but then you have to add that there are borrowed against there house too and spend the money.. i am right or do i miss something?? wasnt this part of the problem too??
david_in_ct - How's that math coming along?
OT sort of : How insolvent is CITI? Here's how :
"Some banks also are cutting back on their existing office space. Earlier this month, Citigroup Inc. quietly put on the market five floors of its 42-floor office tower in Canary Wharf. The company leases the space and is trying to sublet the empty floors, says spokesman Rob McIvor. He said the bank was able to open up the space after tightening staff seating plans. He said the empty floors aren't related to layoffs of fewer than 100 London staffers in recent months."
These idiots are so desperate for cash that they are cramming workers into considerably less space just so that they can sublease some property for some more cash.
david_in_ct writes:
AHOC:
And some people wonder why income is not distributed more evenly....
david_in_ct | 02.27.08 - 4:45 pm
David,
I guess that income distribution is not correlated with reading comprehension. Nice job on the obnoxious comment and previously incorrect analysis.
hc-I see what you are saying, though your example is a bit extreme. But even in bubble areas only a limited % of homeowners bought at or near the peak. All those who bought between 1960 and 2002 or 2003 will still be ahead of where they bought even if prices drop 20% from some arbitrary peak value in say 2005. You are certainly correct that there are other areas where there will be losses, though.
Aheadofthecurve | 02.27.08 - 5:43 pm
Not really a question of when they origionally bought if they did cash out refis or had big HELOC's. There was more than a fair amount of that going on. Durring the whole inflation of the bubble era, mortgage debt was rising as a percent of total market value of residential real estate. CR has posted that graph many times (although presented as % equity in houses). Currently total equity stands around 50%, lowest on record, and that included the 32% of homeowners who have had mortgage burning parties (mostly lil old ladies).
Aheadofthecurve,
In a normal housing market, when the house is not upside down, it is common for a lender to lose 20-30% on a forclosure due to legal expenses, vandalism to the house, etc. Today, with the house likely already upside down, and the time period to get the house off the books even longer, 50% is very realistic.
FYI, I heard of one distant business aquaintance who recently paid $290K all cash for a home that sold in 2006 for $929K! That is 70% off...and does not even factor in lender carrying expenses, legal expenses, etc. By the way, the house was in the Brentwood area, near the Sac River Delta.
hc:
yes, because different localities can have different pricing patterns the average is not a clear indicator of distress.
I don't know if you have followed the discussion but I built a little simulation which took as its base price the case shiller us home index. I then split the US into 10 different indexes so as to get a dispersion about this mean. The strongest pricing index rose about 90basis points per month or about 11% per year over the index, and then declined by the same excess rate on the way down. extending the case shiller index out over another 20 months at a pricing decline rate of about 50 basis points a month gave me estimates of 18% of all mortgage holders upsidedown on the ir mortgage (mortgage > house price) with 9% underwater by 10% or more.
The model is very straightforward, but for the moment does not include helocs, but also does not include any principle payback. The point of the exercise was to get a decent ballpark for the amount of 'underwaterness' in the event of a 20% peak to trough decline in the case shiller index. So if the answer is that only about 9% of mortgage holders end up in a position of 10% or worse upside down, it seems beyond the pale to be forecasting jingle mail to the tune of 20 -40 of homeowners with mortgages.
I tried to post the code for the model so others could see what was done and they could poke holes in it but it does not want to post on haloscan. I would be happy to email it to anyone interested. Unfortunately you won't be able to run it because it requires a bunch of other software to make it actually work, but anyone who could program in c, basic or probably excel could duplicate the efforts.
Observing:Who are you? I must know!
Jim A: But the Alliance!
"...as some forecasters now do..."
i personally liked the turn of phrase
JLR:
"Nice job on the obnoxious comment and previously incorrect analysis."
I have no problem being wrong. In fact I like it because then I learn something. If you could show me the error of my calculation I would be appreciative.
TIA
D
Roubini at p. 11:
"Second, the problems of the economy are not just problems of illiquidity but rather more deep seated problems of insolvency; and monetary policy cannot resolve serious credit problems in the economy."
Question: do not the widening interest rate spreads and more conservative lending standards work as a re-capitalization of banks? And if so, doesn't this argue counter (to some degree) that solvency cannot be addressed or resolved by Fed monetary policy?
Anyone?
david_in_ct : I already did at 5:24 pm.
Much as I love Roubini's ability to stir the pot, what he does not acknowledge at the end of his post is that its not just the banks that hold all the mortgages....he really does not address the whole RMBS market, but that would most likely be too complex for Congress.
"Before you brainiacs continue with your misrepresentations, has it dawned on you yet that CR was saying that 50% x 15% = 7.5% of mortgage losses (= $1T), and 50% x 30% = 15% (= $2T) of mortgage losses?"
I get that 50% of 15% = 7.5%, however I don't know what these numbers are refer to. If you could explain what they are it would make it easy for me to respond.
thanks
d
"the 32% of homeowners who have had mortgage burning parties (mostly lil old ladies)."
I resent that remark. I feel fine. Mostly. Oh wait, that's lil, not ill. Guess I had better stick to my knitting.
Sorry.
Let's clear up "Black Swan".. per Wiki
""The term black swan comes from the ancient Western conception that all swans were white. In that context, a black swan was a metaphor for something that could not exist. The 17th Century discovery of black swans in Australia metamorphosed the term to connote that the perceived impossibility actually came to pass.""
Yes, I know.. Taleb's book cites 9/11 as a Black Swan, when it really wasn't.
In practice, the term seems to mean, "I couldn't figure out a way to put that data in my quant model'. Which is why CR and others predict, 'mild, shallow, recession'.
"Logically, not everyone will default. There aren't that many sub-prime loans. The effect of the defaults will be small. Deficits don't matter." You could support each of these cases, statistically.
So.... if it's not in your model, you can't see it. You can't predict it... Until "The Chicken of Depression" shows up on your doorstep.
It's LTCM all over again.
"Ancient and Hermetic Order of the Shrill"
LOL!
Congrats on the rise on the pecking order!
NEAT
Awesome book
Deflationary Jane
I wager Taleb read Dostoevsky and the old Russian "white crow" story.
"I just read that whole document and my head is about to explode. No surprises for the bears, but there is no way J6P can process that much information."
Oh I don't know. I read the whole thing as well, and it seems pretty clear to me.
We're screwed.
Does anyone know who invited Roubini? At least, was it a Democrat or a Republican?
Yossarian: I recently read the book. While I found Taleb to be a reasonably slick writer, to a large extent the message comes down to "some crazy sh*t happens and no-one can predict it." Since I was trained in an empirical science (biochemistry) and not economics or finance, I have never believed you can model any but the simplest of systems (bacterial growth is an example). So to a large extent I felt he was demolishing a straw man. But it seems enough people believe in that straw man to make the exercise useful.
In this credit debacle, the question comes down to did those peddling the garbage actually believe the models suggesting that you could have high yield and low risk at the same time or did they use the models as a smokescreen. I tend to believe the latter, but I can't prove it.
Yea Joe, I'm with you there. I, too, have just read through the entire bit, and yes, we're screwed and tattooed!
You know nothing of a blackswan until you have experienced my pain and survived through it to ultimately succeed.
All other opinions are entirely worthless and foolish.
david_in_ct:
Using CR's numbers of $2T loss for 20M foreclosures (the 30% price decline case), the average loss is $100K. That would be 50% of the $200k average loan you mentioned. For 100% LTV, the pure loan loss would be $60k and the remaining $40k would be foreclosure processing etc.
That $100k average loss is not all that unreasonable, is it? CR meant the 50% to be an aveage, not a fixed amount for every case, esp for expensive houses.
I am more worried about depressflation than stagflation.
CR and Tanta.. as usual you rock.
Also, if I wasn't scare already, I would be shocked at Dr. Roubini's Congression testimony. Oh well, at least I live in interesting times.
Good grief.....with all the money Nouriel is raking in on his blog and consulting, could he please hire a copy editor? The man can hardly write English.
"Using CR's numbers of $2T loss for 20M foreclosures (the 30% price decline case), the average loss is $100K. That would be 50% of the $200k average loan you mentioned. For 100% LTV, the pure loan loss would be $60k and the remaining $40k would be foreclosure processing etc."
Here are the things that I see as being wrong with this calculation:
2, There is an assumption above that every upside down borrower walks away even though that has never happened in the past and there have been plentiy of upside down people in other housing declines
Last year which was admittedly a pretty horrid year for housing saw about 250k foreclosures through to completion. Do you really think it is reasonable to postulate an 80x increase?
One thing you can be certain of, is that long long before you got anywhere near those kind of numbers the fed would simply monetize ALL the paper. Gold might go to 2000 and oil to 200 but that would end the foreclosures on the spot.
Aheadofthecurve,
Most in finance, RE, tech are "true believers". They truly believe the crap they spew. That is why so many of them will crash and burn. They literally think what is happening was impossible, so they are leveraged (lifestyle wise) to the hilt. Live by the sword, die by the sword.
david in ct, I think your use of average LTV is leading you astray. Some locations were way overpriced at the peak of the bubble, and almost all the loans were 100% LTV or very close, and for enormous amounts of money per property. That 30% or whatever that get hit and walk are not spread evenly over the country.
Roubini links to the full hearing, which was pretty rich. The four witnesses go in order from least bearish (Alice Rivkin in a fabulous dowager outfit, claiming regulation couldn't have stopped the bubble) to Roubini, who took no prisoners. Roubini got most all the attention during followup questions. Looked like Barney Frank took it as a wakeup.
Added bonus: Ron Paul being random.
Ah, good to hear that Ron Paul was there in some fashion! His pointed questions are often fun!
Lions, tigers and BEARS....OH MY!