Financial Times Interview With Professor Roubini
Submitted by
CalculatedRisk on Mon, 05/26/2008 - 7:12am (73 comments)
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It's just not a challenge any more.
I would be very interested to hear his predictions about the losses pertaining to the UK and Australian housing bubbles.
Primus inter pares.
Would prefer FT interview with CR.
At 3:20 in, Roubini makes the intriguing comment, "In the US, mortgages are non-recourse loans." That can't be right.
Did Roubini have a big night and just roll out of bed to make the interview?
Halosca
Minimum losses of a trillion dollars for the financial system. Gee, that isn't too bad. I was worried at first before I heard his comforting words.
Please,no bad puns about decoupling.ouch.
There were comments, and then they disappeared.
Mine was this: At first I was really worried. Then when he said the minimum losses for the financial system would only be a trillion dollars I was relieved. Not too bad at all.
Please don't feed the trolls.
What are "trolls"? Is Krudlow a troll?
Hmmm... Roubini's estimite of 20% price declines seems really optimistic.
Likewise he seems to be more optimisitc with his recession forecast than other economists (weren't Krugman and Stiglitz suggesting something more drawn out?).
Maybe he's trying to shed his permabear image.
Any how it doesn't matter too much.
In recent years economics has demonstrated that it's a cult, not a science.
Time to move on.
CR,
What are your thoughts about Roubini's pro bailout stance (frankly dudd bill)?
Mortgage loans non-recourse? Not where I live. While the ability to collect is always an issue, most states allow deficiency judgments.
I think he means mortgages are, in reality nonrecourse loans, because most defaulters don't have enough assests to justify lendors taking legal action.
Now the FHA will give one a new mortage three years after a default if one is current on other bills with a three percent down payment.
That is not much incentive to continue to make payments on an under water house.
Home owning is better than going to the casino. If home prices move upward you pay, if they don't you don't Is this a great country?
About 3 min in he's asked about the consumer response to being systemically underwater. Even he doesn't venture a guess. We really don't know how people will react. Tanta posits pretty much like in past declines. Dawg thinks ruthless might be the new paradigm. We'll need a few more quarters of foreclosures before we have the data to know in hindsight too late who is correct. IMO rather than muddy to waters with all these bailouts that we are better served adhering to the rules as stated rather than practiced. That means pursing actionable consumer fraud.
Isn't it specified in the mortgage contract whether it is a recourse or non-recourse loan? So it depends upon the contract.
Has Roubini ever publicly approached the potential losses from credit default swaps and interest rate swaps and other OTC derivatives?
I would like to see a debate between Roubini and Ben Stein.
"‘Perhaps 60% of today’s oil price is pure speculation’"
by F. William Engdahl. FSO Editorial 05/02/2008
Boy, you could cut the sexual tension in that interview room with a knife.
At 3:20 in, Roubini makes the intriguing comment, "In the US, mortgages are non-recourse loans." That can't be right.
Yeah. I think the whole idea is with most mortgages the homeowner can just "walk away" even if they're underwater.
According to my limited knowledge, with a recourse loan the lender would be able to come after the borrower if they couldn't get back the full value of the loan by selling the house.
But that's not how it is in the US.
Here you can buy houses and just walk away from them right and left. More people should try it IMO - it's a real hoot.
Like others here, I was distracted by Roubini's misstatements about mortgages. However, he may have been using sloppy shorthand to say what Tanta has always said - an underwater mortgage is at much higher risk of foreclosing, whether you call it walking away or life occurring. Certainly a trillion dollars and a twelve month recession doesn't strike me as outlandish or pessimistic anymore.
Roubini looks a little rough. Wonder what they were doing before they started the recording?
Boy, you could cut the sexual tension in that interview room with a knife.
You felt it too?
SHOCKING. 1.2 Trillion is the floor for losses. We are about 1 third of the way there. This thing gets worse and worse everyday.
I think you guys are out of line about anything untoward happening before that interview.
Still... something doesn't seem right.
And you don't hear Roubini talking about moral hazard do you?
I thought Roubini was a lot more optimistic than one would expect from a permabear.
Housing prices are down 15% and will fall about 20%.
Recession could last 18 months, but Frank-Dodd bill could cut that to 12.
Monetary authorities have been aggressive in both fiscal and monetary policy, thus lessening the impact the credit bubble would have had.
So the CNBC 'short and shallow' party line isn't accurate. Who thought it was?
The non-recourse statement was just a reflection of current reality rather than law, but he might be wrong on that point. The reality may change and banks may get more inclined to pursue deficiency judgments.
I thought Roubini was a lot more optimistic than one would expect from a permabear.
Housing prices are down 15% and will fall about 20%.
Recession could last 18 months, but Frank-Dodd bill could cut that to 12.
Sounds like he's eying Bernanke's job.
Roubini always looks like that. His appearance is a rough as his speech.
I believe non-recourse is the exception, not the prevailing condition. However, as a practical matter most defaulting borrowers have very little other wealth to go after.
he may have been using sloppy shorthand to say what Tanta has always said - an underwater mortgage is at much higher risk of foreclosing,
Many homes in the US are non recourse, and in many of the cases that are recourse, the recourse is worthless. You can't get blood from a turnip.
I don't believe that there are that many truly ruthless borrowers that are coldly calculating the economic consequences and determining their behavior from that. But that's only because I don't believe there are that many borrowers who can calculate beyond their next paycheck.
Sounds like he's eying Bernanke's job.
ac, my take was that he was praising Bernake for his response to the meltdown.
But I wouldn't mind him having some position in the next administration.
As several lawyers have said here a while ago, it is simply impractical to pursue deficiency judgments on a larger scale.
Even if it were done, juries won't go for it when corporations can walk away unscathed. Every defense lawyer will point this out with one example after another. I just dont see how recourse loans will be pursued except in the case of outright fraud!
Oh, and just to amplify the point. Wait until the first jury throws out one of these cases and therefore provides the right publicity for the ease of walking away. Then there really will be a stampede.
Anybody willing to risk it?
in the third segment roubini is asked if he is optimistic about any investment choices out there.
roubini seems to dodge the question and answer a different one...saying he is not as pessimistic as some in that he sees this as a U shaped downturn, not L shaped
later on he says he likes cash!!!
guess the answer by implication was a resounding, NO
OT but related, on NPR business news this morning i fleetingly heard a story which reported that Maryland leads nation in RE downturn, having posted 38% decline yoy...is that right???
i ask how will the banks go after each individual borrower? Due to the repackaging of loans many cannot find who owns the mortgage. If the originator is no longer around the paperwork might not exist. At the end of the day all the homeowners will have horrible credit and their will be a huge swath of the population who cannot buy a home and delay the "recovery" even further.
I just dont see how recourse loans will be pursued except in the case of outright fraud!
Oh, there could be more pursuit in the future and not the trivial variety.
Except where deficiency judgments are barred by law, all the lender has to show is that the borrower owed x and the security sold for a net of y. The difference (x - y) plus costs and fees becomes the deficiency judgment.
If the lenders atart filing those lawsuits, I would guess 90% would go by default. The defendant wouldn't appear and the judge would just sign off on it.
You don't get to a jury unless you can pay the cost of defending the lawsuit in the first place and how many foreclosed borrowers would be in that position?
As to why the lenders might change their course of action, all the regulators need to do is let them list the judgments as assets and, whoa, they're solvent again.
Lionel
Tim
regarding your perceived sexual tension between interviewer and roubini..
possibly you were looking in the mirror
the rear view mirror
ac, my take was that he was praising Bernake for his response to the meltdown.
But I wouldn't mind him having some position in the next administration.
My problem is I feel that bold untested proclamations like "Recession could last 18 months, but Frank-Dodd bill could cut that to 12" from economists may be at the root of the problems we're having.
Economics reminds me of medicine 150 years ago.
Everybody claiming to have a fix to what ails you, but most of them amounting to just some concoction of morphine or cocaine.
Maybe a few bad economists have ruined the reputation of everybody else, but I see no evidence that this profession has the ability to "make things better".
That makes me deeply suspicious of anyone who makes this claim - I assume they're doing it for personal benefit at the expense of their hapless "patients".
Of course doctors have to experiment and butcher countless "victims" in order to get their science right. But I don't want the country I live in to be one of those guinea pigs.
Re
I agree if there was fraud it was more perpetuated by lenders like CFC. I think they are in more legal trouble than the homeowners.
Somebody get Roubini a girlfriend. He looked like he had been at the titty bar all night long.
Anyway...I think by now we have covered most of the problems, I am more interested in the solutions.
Do you think all of those engineering grads that got sucked into "high(times) finance" can be re-purposed into alternative energy-related research and development?
I am having trouble coming up with anything else that can tow us out of this mess.
all the regulators need to do is let them list the judgments as assets and, whoa, they're solvent
For how long? Cascading bankruptcies would follow, assets no longer good.
Tim , Lionel
I was just trying to be funny so please don't get mad!
sportsfan,
It would take a lot of due diligence and effort on the part of the lenders to even figure out if they have a case. Lots of money spent on very little return on aggregate.
I am absolutely convinced that they would lose a number of these cases in court. Note that there would be quite a few organizations that would help defray legal costs for such an undertaking. It won't take many lost cases for this to become a stampede. It is too risk for the lenders to pursue.
o problemo.
sdtfs,
Not everyone qualifies for bankruptcy.
Not everyone who qualifies files.
Certainly, the idealized 'walkaway' borrowers (if they do exist) would have to deal with the judgment in some other manner.
From the lender's perspective I would guess it would be all about recovering cents on the dollar and playing the percentages to do that.
Even if you respect Roubini, you wouldn't want him in the administration, it would be better to have as an adviser. Once inside an administration, even the best can be swayed by both subtle and overt political pressure. Not to mention being seduced by being the source for government stats.
Tim, Thanks
I was over the top with the try for humor.
http://tinyurl.com/57t4ut
This is good to post again, and should be require reading.
Likewise with this:
Immoral Hazard
It would take a lot of due diligence and effort on the part of the lenders to even figure out if they have a case. Lots of money spent on very little return on aggregate.
RE, I can't think of anything easier than saying I'm the lender (or agent of the lender); he promised to pay x and pledged security; he defaulted; the security sold for y; he owes me the difference.
All the lender needs is a document factory to spit out the text, change the name of the defendant and the amount owed and file it.
If a lender can do that for $1,000 and get a judgment for $100,000 (one cent on the dollar), then 'cents on the dollar' is a guaranteed winner.
For a purportedly smart guy, he seems pretty dumb in that interview. Aggressive government action will limit losses? Since when has aggressive government action done anything except increase costs for people, much less limit losses? Moreover, the claim of shortening the recession by prolonging the time it takes for housing prices to correct to fundamental, sustainable levels? That just doesn't make sense.
He reminds me of Bill Gross in his statements: he obviously has some idea about what he's talking about, but he's twisting the implications and conclusions to support his own agenda, instead of coming to more correct, objective conclusions. Large chunk of salt with Roubini...
Even if you respect Roubini, you wouldn't want him in the administration, it would be better to have as an adviser. Once inside an administration, even the best can be swayed by both subtle and overt political pressure. Not to mention being seduced by being the source for government stats.
You can already see the dark side of the force working it's evil magic on Roubini.
The idea of being involved in the central bank.
Controlling all that money...
Peoples lives in your hands...
What wouldn't an economist say or do to be in that position?
What bubbles wouldn't they promise to blow for just a chance...
I think there's something to that saying "Money is the root of all evil." Especially when that money is controlled by just a few hands.
Severe overbuilding and artificially incentivized home borrowing & lending. Securitization offloads risk to dumb bagholders. Defaults rise as limits to musical chairs ends. Structured investments begin to wobble, CDS with weak counter parties begin to wobble, runs of banks chew through reserves, markets suddenly become severely underpriced from forced sales and glut of supply. Risk/reward ratio reevaluated. Series of no-bids on everything from REO's to ARS. Systemically important IBs nearly fail. Gov't intervention and meddling becomes widespread. Global financial panic nearly takes down ALL global markets. Plunge protection teams and artful dodging of financial bullets delay unwinds and prop markets. Players rush bonds, forex, commodities trying to hedge and trigger parabolic inflation. Borrowed-time initiatives simply fail to give enough financial entities time to put house in order. Global markets tank yet again. Taxpayer backstopped initiatives prove still too small to plug gaps. Central banks coordinate to monetize debts, destroying currency and creditors. Market mayhem, equities plunge below comparables in GD. People panic, hoard, spend carelessly to obtain anything for their quickly devaluing paper money. Social unrest. Game over. Reset. All because Joe Schmoe wanted a roof over his head but reached beyond his means, and because the social order was unable to produce enough meaningful products that could ensure full employment. KABOOM! Roubini, Shiller, Schiff, Stiglitz, Krugman, Walker, Faber, M.Wolf, Authers, even Cramer. Anyone who didn't see this coming and made no preparations are going to be very, very grim.
What exactly is a bloddy finger? Doesn't sound too nice...
On the recourse / non-recourse issue....
FWIW, it's my understanding that, in California, purchase money is non-recourse debt. Refi money and 2nds, 3rds, etc are all recourse debt.
In reality, the only way people bought homes in CA was with a 2nd and if they did only have an 80% or lower first, they hit the WD button on the ATM anyway.
I agree tho with the concept that in most cases, it doesn't matter since there aren't funds there anyway to go after. However, I think this is one of the main issues supporting Prime portfolios of debt. These guys still got 100%, interest only loans and are now 20% underwater, but the only thing they can hold on to is small (relatively) payments that they will make since they have other assets that are at risk. Welcome to the new breed of landlord. Eventually, they will have to sell too.
SOVEREIGN DEFAULTS...COMING SOON TO A COUNTRY NEAR YOU.
RGE - No but this time really is different
It all adds up to a s*!t storm, regardless of how you parse it.
Meanwhile, the Fed throws in more fairy dust and everyone keeps on dancing.
Conjure is amused.
Off-Topic: Asian went down 2% today, and Europe went down 1.5%... if they go down again tomorrow are we looking at an emergency rate cut? Otherwise, its looking like Dow getting close to 12k?
YSLP--you remember the MLK day events, yes? Similar, 3-day weekend with Asia and Europe tanking, then as shorts set up hard for Tuesday, Fed meddling sent much of their money to dollar heaven. What would restrain them from a similar if not more venal episode this time? Free Markets? Bah, humbug.
On recourse vs non-recourse see some of the posts by Tanta and comments by the lawyers on earlier posts.
On Roubini's looking rough, he is always a bit informal in my on-line experience, and the tie askew is not odd in my experience except for the military (mine) and Wall Street financial types (the media).
Also consider that it is the beginning of academic conference season and these folks are our on the adrenaline fueled, no sleep circuit. Dr Brad DeLong had a post up yesterday, ostensibly on his way to meet Dr Roubini for lunch ("Masters of the Universe"). For some reason DeLong's site seems to have taken it down. It contained the clause "I halt the cab at the Flatiron Building."
sportsfan,
From my reading it seems that California is a deficiency state. In effect, however, it appears to be non-deficiency state because the lender has to file a lawsuit to foreclose in order to have the possibility of a deficiency judgment.
This is where the risks for the lenders start. Filing the lawsuit is expensive by itself and even incurs the risk of loss. It is therefore an unlikely approach for the lenders to take.
Pursuing deficiency judgments, at least in California, seems highly unlikely. Therefore very little risk to walking away.
Ok, ok.
In Fla, all loans (unless they say otherwise and they virtually never do) are recourse.
But, in the world of residential financing this recourse thing is simply ignored. I've been doing my real estate thing for 32 years; I'm defending a number of foreclosures and a deficiency judgment is simply NEVER asked for.
The same lenders who get judgts against you for defunct car loans--a jgt unlikely to be paid also, never do a thing in the house loan world
I've never understood why. Bad publicity maybe?
For people who have other assets, the fear of losing their credit rightfully eclypes any fear of a deficiency jgt.
Now in COMMERCIAL loans, they do go after people. Usually there is a personal guaranty involved too.
Pay a grand for a default jgt? Surely you jest. They don't pay much more than that for a whole foreclosure!! Which is probably why
the foreclosure mills do such lousy jobs.
They don't have enough servicers to decide who should get a work out or short sale, what makes anybody think that they are going to hire people to figure out who has some money and who doesn't?
And, believe me, if someone does, the erstwhile stupid people will become geniuses at hiding their money. I've had clients who've tried. Believe it or not, the debtors lie! And without a deep pocket source, it is really hard to overcome the lie.
A couple of times, a debtor has shown up with jewelry that looked like it had some value, and I asked the judge to have the debtor hand it over. The judge always looked downright horrified that I'd asked and said no.
Recourse schmecourse, it's not gonna happen. So let's discuss something worth discussing.
And besides, Carthage must be destroyed.
ylsp,
The foreign markets are just following the US market not leading it. I think this time the Fed are going to let the market fall and hope the commodities market follows it down. Did something similar in 2006
"Carthage must be destroyed."
Fine sentiment.
Conjure is ready.
Thanks for your comments, Liz.
From my reading it seems that California is a deficiency state.
Actually, California is a non-recourse state by statute. As a poster described above, there are ways to get into a recourse situation with a refi or second.
But lawyerliz says it's not worth discussing because it never happens.
I guess the future will always be just like the past, at least in Florida.
As Helmut von Moltke said, "...usually only the competent have luck in the long run."
See "Moltke: Vom Kabinettskrieg zum Volkskrieg, Selected Works." Stig Foerster, ed. (Bonn: Bouvier, 1992), p. 631.
Sorry, but all of that German yesterday put Conjure Bag in a martial mood.
sportsfan,
Sorry, if it wasn't clear. My post regarding California was to address the issue of California recourse loans, i.e. loans that had been refinanced or a second taken out.
The reason why I chose California was obvious because it is at the heart of the walkaway issue and its size.
The banks cannot continue writedowns until they build uo their capital base in general? Who wants to buy capital? Suspended animation?
Lucky a major credit market reversal happens only once in several generations? The others were minor?
Once you climb to the top of the mountain what happens then?
My understanding is that FHA loans are technically recourse, but that the feds have never pursued a default.
I heard him say something needs to be done in a few weeks or it will be to late. My guess is it will be to late.
Rob Dawg wants to go after the consumers for fraud. That's a dumb idea. Fill the courtrooms with consumer mortgage fraud cases. The attorneys on both sides will love it. Then the consumer defense could be appraisal fraud, mortgage lender fraud, rating agency fraud, investment bank fraud, central banking fraud, international banking fraud...this could get interesting!