For the second plot, delinquencies by book year, can we assume that the endpoint for the 2007 curve is approximately today?
Then if we line the curves up by calendar time (rather than the time normalized view we see now), the endpoint of the 2006 curve would be twelve spaces to the left? And the 2005 curve endpoint twelve spaces to the left of that?
The question being, what do all those curves look like at the present? Or am I misunderestimating the graph?
Freddie sure seemed to be the dumping ground for Alt-A. Do you think they had massive portfolio growth post 08/07 just to keep the markets open? Or did the investment banks just dump their portfolios on the GSE's because they had the blessing of the FRB and new what kind of mess they created?
The 2007 curve is still a work in progress, right? And while all of 2007 is reflected in the 6 month data point, the 18 month data point would only reflect Jan. 2007 and thus could represent noise.
iceman, it is not an accident. Even if they read this, it wouldnt make any difference. Clearly, there was a tacit or not so tacit agreement in place. If the whole house of cards falls apart, the GSEs are going to be a bailout intermediary. It's a backhanded way of getting to a taxpayer funding of the whole mess. The important thing was that they kept leadership in place that would kowtow to political intent. And it's worked out just grand!
18%-20%? The current consensus for the peak-to-trough decline is around 30%. The Case-Shiller Comp-20 index is already down 18.4% peak to trough. Syron may be looking at OFHEO numbers, which show a far less severe decline. For the sake of Freddie investors, we certainly hope so.
Aug. 6 (Bloomberg) -- Dexia SA, the world's largest lender to local governments, plans to add $300 million to its U.S. bond insurance unit and stop selling coverage for asset-backed debt after the division posted a second-quarter loss.
The capital will allow the unit, Financial Security Assurance Inc., to exceed requirements for a AAA credit rating, New York-based FSA said in a Business Wire statement today. Moody's Investors Service said last month the bond insurance unit might lose its top rating as industry losses mounted.
Dexia will stop insuring asset-backed securities and structured finance, scale back FSA's financial products division and take over its risks, Chief Executive Officer Axel Miller said in a statement. Dexia said in June it would provide a $5 billion line of credit for FSA after putting $500 million of new capital into the unit in February.
If you read the X axis of the chart, the spike up in the Fannie Mae spread over Treasuries conforms very closely with the passage of the stimulus package, which includes a provision to increase the celling on conforming loans from $417,000 to a maximum of $729,750.
Pray, tell me how could negative convexity explain a 30 basis point increase in spreads in a mere week?
CR, excellent work. Good to see moral hazard in graphical form. The only thing I wish to add is an alternate take on your comment; "delinquencies by book year and 2006 is looking very good, but 2007 (on a relative basis) is off the charts because they caved to political pressure and took on all those crappy loans."
It could very well be that older vintages are just taking longer to ramp up default rates as the borrowers are not fully feeling the equity evaporation that affected the '07 loans first. As they find themselves in the next few quarters in the same position as the '07 vintage I suspect they will start defaulting at similar rates.
Here's the original Bush Stimulus Package 2004 to stimulate the crowds. All my flag-waving, hand-in-chest, and flip-flop-clappers that day went all to shame.
ac,
I agree that traders are shorting the yen again, but where are they investing the proceeds? Not oil, not US equities, not dollar debt..any ideas welcome.
This is all good news and will help stocks rocket!!
Re: Lehman Brothers Holdings Inc may sell $30 billion to $50 billion in securities to raise capital and slash its dividend by 90 percent, said Richard Bove, a prominent U.S. banking analyst.
"Agustin Garduno, wearing a paint-stained sweatshirt, said he sleeps in cars and on floors at friends' houses because he can't afford rent. As noon approaches and no contractors have pulled up to the corner of Van Nuys Boulevard and Oxnard Street looking to hire, it will be the fifteenth day he has gone without work. ``If you gave me a ticket, I'll go back to Mexico because here, there's nothing,'' said Garduno, 48, who used to make $1,300 a month and now makes about $500."
ac,
I agree that traders are shorting the yen again, but where are they investing the proceeds? Not oil, not US equities, not dollar debt..any ideas welcome.
Well, that's a good question. I'm not entirely sure, but I have 3 questions/observations.
a) Stocks have been going up recently and the S&P really isn't hitting significant new lows. It could be that additional leverage is making up for a lot of investors who have left the market.
b) I don't have good data on this or know quite what to make of it, but it seems to me like the behavior of the Renminbi may have changed just as US stocks began "decoupling" from the Yen. I.E. maybe there's a hot money redirect into Chinese currency indirectly through the dollar (just pure speculation on my part).
c) I know personally that it's possible to borrow money to put on short positions. I have no idea though if it makes sense (or is even possible) to borrow Yen to leverage in to shorts, but it could be that more and more hedge funds are using leverage to make bearish rather than bullish bets.
Aug. 6 (Bloomberg) -- The states victimized by the collapse of the auction-rate securities market are negotiating with Citigroup Inc., the biggest underwriter of such debt, to pay as much as $100 million to settle claims it fraudulently sold the bonds to investors, a person familiar with the case said.
Citigroup may also buy back more than $5 billion in auction-rate securities from investors stuck with the debt since the $330 billion market collapsed six months ago, the person said. New York State Attorney General Andrew Cuomo told the bank on Aug. 1 he was preparing to sue over the sale of the bonds. A multi state task force has also been investigating New York-based Citigroup, along with other Wall Street banks.
What I see in this chart is a fairly new trend and a dis-connect with any realities that existed before Bush came into power. The economic distortion screams debt and corruption!
I don't think that chart shows moral hazard. 2007 is the only vintage in a declining market for its first year. Had the 2005 vintage, say, been in a market that went down 10% the next year instead of being roughly flat, I 100% guarantee the default rate would have been much higher. Further, the 18 month loans would have been made before the credit crunch came in in August, and before F&F started their market bailout. So the loans supposedly showing moral hazard weren't made under the hazard, and may or may not be worse than prior loans anyway.
It could very well be that older vintages are just taking longer to ramp up default rates as the borrowers are not fully feeling the equity evaporation that affected the '07 loans first.
I agree. A decline of 10% in CA caused most of the 07 vintage to look around and say "why am I paying this underwater mortgage?"
Now that we're down by 30+%, I expect the earlier vintages to also go through the same thinking.
Someone had better hope this is not a bad feedback spiral.
I've been watching how the yen has been dropping. It looks like the carry trade is alive and well. Or its a reflection that folks believe that US recession is over, that US taxpayers bailout everything - so its time to pile into Agency debt. And on a relative basis Yen & Euro should weaken as Asia and Europe are heading into recession.
Rhodium off $2000 from its all time high 60 days ago, (nearly $9,800 per oz!!)
gold is falling at about half the rate of Rh and the decline of oil...
but fall it will, until those with the will and means see the approach of the dollar collapse and feel the crush of stagflation
then gold will phoenix
the smart players took half off the table during the run up and let the rest ride BECAUSE nobody can predict the future, least of all can i, so insurance remains a good idea.
Or its a reflection that folks believe that US recession is over, that US taxpayers bailout everything - so its time to pile into Agency debt.
I was thinking that my self -- a real bailout might cause a riot of funds leveraging into agency debt (seems like you can get a decent spread right now).
But the interest rates on those Fannie bonds seems to suggest that it's just Bill Gross by himself so far.
You guys are on the right track. Alt-A (and OA) vintages are like stacks of shelves in a library. Subprime was actually the first stack, and by reducing house prices, it knocked down the second stack -- 2007 Alt-A -- by pushing those borrowers underwater. Now the 2007 stack is in the process of pushing the 2006 borrowers underwater, and so on.
Anyone that has a forecast for a house price trough should also tell us the "breaker mechanism" by which these stacks stop knocking each other over. The main one, I think, is cash rental yields that compensate investors for risk. Something on the order of 8% should do it.
So, CR, what's the breaker that forms the bottom in house prices in your forecast?
David Pearson writes:
... cash rental yields that compensate investors for risk. Something on the order of 8% should do it.
The problem is that it isn't just risk but risk and uncertainty. Investment real estate is a long term commitment and the uncertainty of future prices allowing competitors to undercut and the uncertainty of taxes and inflation and other government changes demands a really steep premium right now.
"92% of loans over 90% LTV have credit enhancement."
Two questions occur. (1) What is the CLTV or TLTV of these loans and (2) Who, preytell is the counterparty with credit enhancement? On second thought I don't want to know its too depressing.
Freddie and Fannie are conforming only. Places like SF/Pen/San Jose and NoVa were mostly non-conforming loans; probably upwards of 75%.
These areas have thrived off cheap credit, exotic mortgages, and buyers moving up the food chain. Prime borrowers required Alt-A which required Subprime; all of which required appreciating home prices. Start cutting away at that base and see what happens; eventually everyone will feel the pinch.
At the same time the lines between what was considered prime versus the others started to blur and pretty soon everything became A-paper.
So what? Shareholders who were foolish enough to ride that beast will lose and American taxpayers will protect their bond holders so they can continue to wtite mortgages. I think the stock market has moved past this.More banks go down, more homebuilders bite the dust and more lenders get burnt it's just too bad. Not that I agree with these principles but the pigs always get fatter and the bulls always run sooner or later.
just got back from a short vacation. it does not matter what the hell FRE has on it's books or what happens to it. If it starts going bad, they'll just move it to level 3 and forget about it. I've given up on anything happening to F&F. The guvmint will bail 'em.
Despite the rally in equities, mortgage bond spreads are widening over fears that Freddie could shrink its rmbs retained portfolio. This has a nefarious effect on 10/30 year Treasury yields. As spreads widen (and as prepays fall with higher rates and less home equity), the duration (the projected life until prepay) of RMBS increases. To hedge the higher interest rate risk, owners of RMBS have to short more Treasuries, which of course raises interest rates and further pushes up the duration of RMBS.
Another negative positive-feedback loop for the market to contend with.
That's why Freddie should have a 40 year moratorium on foreclosures. ( remember Moses?)
P.S. And meanwhile the investors would make tons of money-acording to Freddie and our great leader Tanta.
My point is that lower priced areas were propping up the higher priced area because homes were 'appreciating' and credit was cheap. Falling home prices in the outer areas (Stockton/Merced/Tracey) will most certainly have an effect on the close in areas (Walnut Creek/Fremont/San Jose) as the move-up buyer pool shrinks. Throw in a tight credit market and look out.
Oakland is also largely non-conforming. Nicer neighborhoods have extremely high prices, still, though lower than SF. Rougher neighborhoods were sub-prime, because only people with no options would live there. Proximity to SF and U.C. Berkeley causes high values in the upper end Oakland neighborhoods. Stupid flippers bought in terrible neighborhoods, believing that prices always go up. Now their stuck and foreclosing.
I concur with Fair Economist on the comment Brian made: "Chart 32 is a great graphical depiction of moral hazard in action." Brian remains awesome, btw, but this comment was a little off.
It's not like there's been some sort of incremental growth in the presence of moral hazard each year; it's always been there. I suppose one could argue that we went from implicit to explicit, but that was a 2008 event.
The English word mortgage shares a Latin root with words which deal with death such as mortal or mortify. The Latin root is mors which literally means death. Mortgage takes its meaning from the Old French word for dead pledge. nuff said
My point is FRE FNMA have significant conventional loan exposure in Northern Californi.
I was painting with a broad brush. More specifically in Oakland, Richmond, Emeryville, San Leandro, Albany, El Cerito. And on the San Francisco side, South San Francisco, Daly City, San Bruno, Burlingame, San Mateo, Redwood City to name a few. All these areas to one degree or another had the far out suburbs that were a stretch for comuters, but offered first time home buyers a chance for the dream. Don't know why SF area residents think their area is immune from the housing collapse.
No one is arguing that the GSE's don't have significant exposure, it's just that non-conventional home loans represent a much larger piece of the pie in the Bay Area. As such exotic mortgages were much more common. When that segment starts failing, and it will, the effects will dwarf the conventional loan failures.
It would be helpful to see the up to date 2006 vintage DQ curve to settle the question. My guess is they have accelerated some, but are no where in the vicinity of 2007.
If you look at the stats of the 2007 books for the GSEs, there is a pronounced deterioration in the quality of loans (by origination stats) that went on the books between roughly Mar and Nov of 07. And there is little doubt in my mind that they stepped in to take on these loans when the private securitizations started to freeze up. (I'll look for the stats and ask CR to post them if I can find them) It is very clear adverse selection, and if you don't think political pressure had something to do with it, I have a few bridges in my neighborhood I'd like to sell you.
randy writes:
"I've given up on anything happening to F&F. The guvmint will bail 'em."
FWIW:
Reconstruction Finance Corporation (RFC)
Britannica Concise Encyclopedia | Date: 2007
"U.S. government agency established (1932) to provide loans to railroads, banks, and businesses. The RFC was an attempt by Pres. Herbert Hoover to counter the early effects of the Great Depression by rescuing institutions from default. It was widely used by Pres. Franklin Roosevelt in the New Deal."
And the F&F rescue will be followed by the Ford/GM/Cerberus rescue, then the homebuilders.
Looks to me like the depression is already here, hiding in plain sight.
Aren't there some origination standards for Alt-A?
I mean, wouldn't true fraud or gross negligence in origination lead to originator liability (and perhaps personal liability or criminal liability given the special status of Fannie/Freddie)?
It seems to me that by 06 and 07 a great many Alt-A originators were so sloppy or corrupt that there is, in point of fact, a civil (and perhaps criminal) case to be made against them.
The originators' business entities have, to coin a term, "imploded" (ahem) but the individuals behind these entities still have a lot of personal wealth that can be pursued.
Who was the assclown that posted to me that FRE wasn't like CFC and WM and WB and all the rest. They are all loaded up with CRAP easy money mortgages, that is why we are in trouble. PERIOD.
I also found the carry trade action freakish today as USD:JPY steam-rolled through major overhead resistance as though it wasn't there, and the money went nowhere. 95% of the time a move like that indicates a big stock rally.
Could the hedges be leveraging shorts? Wow. That is actually a cool concept. I don't see why you cannot borrow money to buy SKF, SRS, DUG for example. Hint, Hint...
Financials were weak all day after Freddie revealed its Liar Loan portfolio, now we get AIG after the bell - ready to lay another big stinky egg?
I'm not saying the GSE's didn't start taking more crummy loans in 2007 - I don't really know - just that comparing loan performance from various vintages at different real periods doesn't tell you much when the market has changed so much. California 2004 and 2003 vintages were just awesome at the start but now they're starting to go back at substantial rates. They were weak loans all along but they were held up by the housing prices. Now they're being exposed.
As to political pressure - well there's lots of things here. There's greed for all those loans, social pressure from the financial system (Bernanke, bank CEOs), Congress, and the President. I don't think Syron much cares about congressmen calling - he doesn't report to them. OFHEO can influence things but it answers to the White House, which doesn't care what Congress says. OFHEO's "pressure" has been soft so far - they have lifted a lot of regulatory requirements. But I don't think they've tried to make the GSE's make bad loans, they've just allowed them to. If the GSEs did take on a lot more junk loans in 2007 I think it was basically voluntary.
My personal guess - and we're all guessing unless there's an investigation of the GSEs with subpeona power - is that the GSEs were wheedled by the financial system to save it, and were willing to do it for market share and to prop up their own book. Then they saw the kind of junk they were taking on and started ramping the fees (early 2008). They didn't realize what they were getting into - no excuse, they should have - but it wasn't intentional, done with a Dr. Evil laugh.
stock-regulator, Freddie is reporting 1.4% delinquency at 18 months. There are Alt-A bonds of similar vintage with defaults above 30%. There is a difference. Maybe not enough, but they weren't swimming in the same pool.
While I appreciate the free wheeling nature of the comments and make comments that are not especially important myself, I would like some way to sift through all the comments made to get to the ones that really make a contribution to understanding the problem. Is there some way Tanta or CR could flag the important comments?
"Don't know why SF residents think their area is immune from a housing collapse".
Anon- I know why!
It was their unique willingness to believe Realtor tripe about how special the area is, repeated incessantly by the local media, compounded by their inherent belief that they are, indeed special. (smarter, richer and and more sophisticated than your average American- they really, literally believe that).
Same thing in Seattle. A special sort of hubris that can't be topped anywhere in the US, and that includes Central Park West and 5th Avenue.!
A bigger bunch of blowhards you will not find anywhere on the continent.
What's interesting to me is, as the market begins collapsing in these ultra special_ snob appeal markets, the local media gets less of their ad revenue from REIC and actually begins telling partial truths about the market there!
The Seattle Times has begun doing a 180 from it's previous reporting on the local RE market/economy in the past month.
Outside of the "yeah, guess maybe the market here's not as immune as 2 months ago, they actually did a huge multi page spread in the Sunday magazine section on the explosive use of local pawn shops to tide people over for gas and food- people whose mortgages were in the several K a month range.
Now, any idiot with a Zip Realty account could have been watching this market deteriorate for the past year and a half.
But these people refuse to be "confused by the facts" until the fit really starts hitting the shan.
jim- learn to speed read- skim til you get to the stuff you think is important.
It's a skill ,I think, that can be developed like any other skill.
No better place in the world to practise developing those skim reading skills than the comment sections of blogs, especially when the comments have gone from 40 to 200 in the past year.
FE - I know there is a difference FRE and FNM are not AS bad as CFC and WM and the like BUT their alt-a loans are the SAME. They will default at the same rate.
You all keep thinking these are still the quiet companies they were 6 years ago and you all would be WRONG.
But I am sure Tanta will have a silly post defending them or badmouthing the MSM soon and all will be well.
To answer two questions at once: credit enhancement is usually mortgage insurance, provided by the private MIs like MGIC, PMI, and yes, AIG.
Note the decline in credit enhancement on page 28, from 2005 to 2006. What I have been told is that normally when the GSEs bought a pool of Alt A loans, they would get an MI pool policy to cover a lot of the risks. In 2006, Fannie continued that practice, but Freddie decided that, nah, MI wasn't worth the cost, so stopped buying coverage for awhile.
ghostfaceinvestah, it'll turn out to be a good call if the MI's go BK. I'll be pretty interested to see what RDN's results are on Monday since they were more aggressive on quality than the others. Going after all those NIMs finally burned them.
Wow. First?
2007 was the Year of the Straw Buyer.
Who was the CEO during 2007? I forget.
"Who was the CEO during 2007? I forget."
LMFAO!!!!!!!!!!!!!!
For the second plot, delinquencies by book year, can we assume that the endpoint for the 2007 curve is approximately today?
Then if we line the curves up by calendar time (rather than the time normalized view we see now), the endpoint of the 2006 curve would be twelve spaces to the left? And the 2005 curve endpoint twelve spaces to the left of that?
The question being, what do all those curves look like at the present? Or am I misunderestimating the graph?
What's up with the 2000 loans?
Freddie sure seemed to be the dumping ground for Alt-A. Do you think they had massive portfolio growth post 08/07 just to keep the markets open? Or did the investment banks just dump their portfolios on the GSE's because they had the blessing of the FRB and new what kind of mess they created?
What surprises lurk with Fannie?
That 2007 delinquency rate line is off the charts. 2007! Wasn't anyone reading this blog in 2006 at the GSEs?
The 2007 curve is still a work in progress, right? And while all of 2007 is reflected in the 6 month data point, the 18 month data point would only reflect Jan. 2007 and thus could represent noise.
This is probably a stupid question, but who actually got Alt-A mortgages in 2007?
ARW, in 2000 you're seeing the effects of a mild recession on default rates. Things are different this time.
FT,
That would be the borrowers previously known as 'sub-prime'!
feleventh
and fed ucked
iceman, it is not an accident. Even if they read this, it wouldnt make any difference. Clearly, there was a tacit or not so tacit agreement in place. If the whole house of cards falls apart, the GSEs are going to be a bailout intermediary. It's a backhanded way of getting to a taxpayer funding of the whole mess. The important thing was that they kept leadership in place that would kowtow to political intent. And it's worked out just grand!
And 2008 is that line on the left that goes straight up?
"This is probably a stupid question, but who actually got Alt-A mortgages in 2007?"
All of California pretty much. Don't worry though even though they didn't put anything down they had GREAT Fico scores.
Nothing to worry about.
Last
18%-20%? The current consensus for the peak-to-trough decline is around 30%. The Case-Shiller Comp-20 index is already down 18.4% peak to trough. Syron may be looking at OFHEO numbers, which show a far less severe decline. For the sake of Freddie investors, we certainly hope so.
Related OT - looks like more credit squeeze for municipalities:
Dexia Adds $300 Million to FSA Bond Insurance Unit (Update1)
By Fabio Benedetti-Valentini
Aug. 6 (Bloomberg) -- Dexia SA, the world's largest lender to local governments, plans to add $300 million to its U.S. bond insurance unit and stop selling coverage for asset-backed debt after the division posted a second-quarter loss.
The capital will allow the unit, Financial Security Assurance Inc., to exceed requirements for a AAA credit rating, New York-based FSA said in a Business Wire statement today. Moody's Investors Service said last month the bond insurance unit might lose its top rating as industry losses mounted.
Dexia will stop insuring asset-backed securities and structured finance, scale back FSA's financial products division and take over its risks, Chief Executive Officer Axel Miller said in a statement. Dexia said in June it would provide a $5 billion line of credit for FSA after putting $500 million of new capital into the unit in February.
[snip]
I thought Paulson told FNM to buy as much collateral junk as they could for The Bush Stimulus Package? What happened to that stuff?
Looks like we're headed for a complete rewind of the Yen carry trade.
Of course consumers (notably homebuyers) get hammered by higher interest rates as a result.
But that's how we do business in this country. Main Street is the lamb we sacrifice to Wall Street.
I guess those guys in the 30s knew what they were talking about: It take complete disaster to stop the speculators.
What does credit enhancement mean?
Old post from late Feb
If you read the X axis of the chart, the spike up in the Fannie Mae spread over Treasuries conforms very closely with the passage of the stimulus package, which includes a provision to increase the celling on conforming loans from $417,000 to a maximum of $729,750.
Pray, tell me how could negative convexity explain a 30 basis point increase in spreads in a mere week?
CR, excellent work. Good to see moral hazard in graphical form. The only thing I wish to add is an alternate take on your comment; "delinquencies by book year and 2006 is looking very good, but 2007 (on a relative basis) is off the charts because they caved to political pressure and took on all those crappy loans."
It could very well be that older vintages are just taking longer to ramp up default rates as the borrowers are not fully feeling the equity evaporation that affected the '07 loans first. As they find themselves in the next few quarters in the same position as the '07 vintage I suspect they will start defaulting at similar rates.
LOL Speed.
And yet the stock market levitates.
What happened at 11am today to goose the markets?
Corn, Soybean Prices Tumble as Crops in U.S., China Flourish
Corn, Soybean Prices Tumble as Crops in U.S., China Flourish - Bloomberg.com
These clowns are Cornholiod, they will be ASSimilated.
Here's the original Bush Stimulus Package 2004 to stimulate the crowds. All my flag-waving, hand-in-chest, and flip-flop-clappers that day went all to shame.
ac,
I agree that traders are shorting the yen again, but where are they investing the proceeds? Not oil, not US equities, not dollar debt..any ideas welcome.
That was done under the implicit guarantee.
Imagine what they can do under an explicit guarantee...
There should be some regulatory oversights into that tax-dollar sand box.
Usually, moral-hazard risk-taking tends to exercebate after the guarantee becomes explicit.
Regulartoy oversight, now!!
This is all good news and will help stocks rocket!!
Re: Lehman Brothers Holdings Inc may sell $30 billion to $50 billion in securities to raise capital and slash its dividend by 90 percent, said Richard Bove, a prominent U.S. banking analyst.
Quote from Bloomberg:
"Agustin Garduno, wearing a paint-stained sweatshirt, said he sleeps in cars and on floors at friends' houses because he can't afford rent. As noon approaches and no contractors have pulled up to the corner of Van Nuys Boulevard and Oxnard Street looking to hire, it will be the fifteenth day he has gone without work. ``If you gave me a ticket, I'll go back to Mexico because here, there's nothing,'' said Garduno, 48, who used to make $1,300 a month and now makes about $500."
Anyone? Anyone?
ac,
I agree that traders are shorting the yen again, but where are they investing the proceeds? Not oil, not US equities, not dollar debt..any ideas welcome.
Well, that's a good question. I'm not entirely sure, but I have 3 questions/observations.
a) Stocks have been going up recently and the S&P really isn't hitting significant new lows. It could be that additional leverage is making up for a lot of investors who have left the market.
b) I don't have good data on this or know quite what to make of it, but it seems to me like the behavior of the Renminbi may have changed just as US stocks began "decoupling" from the Yen. I.E. maybe there's a hot money redirect into Chinese currency indirectly through the dollar (just pure speculation on my part).
c) I know personally that it's possible to borrow money to put on short positions. I have no idea though if it makes sense (or is even possible) to borrow Yen to leverage in to shorts, but it could be that more and more hedge funds are using leverage to make bearish rather than bullish bets.
Maybe somebody else has some ideas.
Citigroup May Pay $100 Million to Settle Auction-Rate Claims
By Karen Freifeld and Michael McDonald
Aug. 6 (Bloomberg) -- The states victimized by the collapse of the auction-rate securities market are negotiating with Citigroup Inc., the biggest underwriter of such debt, to pay as much as $100 million to settle claims it fraudulently sold the bonds to investors, a person familiar with the case said.
Citigroup may also buy back more than $5 billion in auction-rate securities from investors stuck with the debt since the $330 billion market collapsed six months ago, the person said. New York State Attorney General Andrew Cuomo told the bank on Aug. 1 he was preparing to sue over the sale of the bonds. A multi state task force has also been investigating New York-based Citigroup, along with other Wall Street banks.
[snip]
What I see in this chart is a fairly new trend and a dis-connect with any realities that existed before Bush came into power. The economic distortion screams debt and corruption!
ac,
How would it look if there was a currency intervention underway?
I don't think that chart shows moral hazard. 2007 is the only vintage in a declining market for its first year. Had the 2005 vintage, say, been in a market that went down 10% the next year instead of being roughly flat, I 100% guarantee the default rate would have been much higher. Further, the 18 month loans would have been made before the credit crunch came in in August, and before F&F started their market bailout. So the loans supposedly showing moral hazard weren't made under the hazard, and may or may not be worse than prior loans anyway.
That increase in rate does seem to match The Iraq war ... hmmm?
energyecon,
Good point...perhaps Japanese govt is intervening to aid its export sector given US weakness. Although euro is now weakening as well.
It could very well be that older vintages are just taking longer to ramp up default rates as the borrowers are not fully feeling the equity evaporation that affected the '07 loans first.
I agree. A decline of 10% in CA caused most of the 07 vintage to look around and say "why am I paying this underwater mortgage?"
Now that we're down by 30+%, I expect the earlier vintages to also go through the same thinking.
Someone had better hope this is not a bad feedback spiral.
AC
I've been watching how the yen has been dropping. It looks like the carry trade is alive and well. Or its a reflection that folks believe that US recession is over, that US taxpayers bailout everything - so its time to pile into Agency debt. And on a relative basis Yen & Euro should weaken as Asia and Europe are heading into recession.
I would be very wary of this trade.
Rhodium off $2000 from its all time high 60 days ago, (nearly $9,800 per oz!!)
gold is falling at about half the rate of Rh and the decline of oil...
but fall it will, until those with the will and means see the approach of the dollar collapse and feel the crush of stagflation
then gold will phoenix
the smart players took half off the table during the run up and let the rest ride BECAUSE nobody can predict the future, least of all can i, so insurance remains a good idea.
ac,
How would it look if there was a currency intervention underway?
Not sure. Only I'd suspect that if the ECB wanted to devalue the Euro vs bucky, for example, they could easily do so by issuing debt to buy dollars.
Bidding starts anew for $35B Air Force tanker deal
Bidding starts anew for $35B Air Force tanker deal
Better damn well get the winner right this time in this little banana republic or heads are going to roll.
PDF alert
New Home Prices
Median and average house price in US Jan 1963 - June 2008. Some bored cookie can turn it into an excel chart.
Look at how it gapped up in 2001. Both median and average peaked in March 2007. When did NEW implode?
Or its a reflection that folks believe that US recession is over, that US taxpayers bailout everything - so its time to pile into Agency debt.
I was thinking that my self -- a real bailout might cause a riot of funds leveraging into agency debt (seems like you can get a decent spread right now).
But the interest rates on those Fannie bonds seems to suggest that it's just Bill Gross by himself so far.
Aren't Freddie and Fannie homes for unemployed politicians? No wonder there was pressure from those smart guys on Capitol Hill.
KFP,
What would a dollar prop job look like - a coordinated intervention?
Even "rest of book" doubled from year ago. How does that DOLLAR AMOUNT compare to Alt-A D+90?
JP and Fair Economist:
You guys are on the right track. Alt-A (and OA) vintages are like stacks of shelves in a library. Subprime was actually the first stack, and by reducing house prices, it knocked down the second stack -- 2007 Alt-A -- by pushing those borrowers underwater. Now the 2007 stack is in the process of pushing the 2006 borrowers underwater, and so on.
Anyone that has a forecast for a house price trough should also tell us the "breaker mechanism" by which these stacks stop knocking each other over. The main one, I think, is cash rental yields that compensate investors for risk. Something on the order of 8% should do it.
So, CR, what's the breaker that forms the bottom in house prices in your forecast?
"Geoff writes:
Who was the CEO during 2007? I forget."
What would have happened if Freddie had not taken on those loans?
Economically and politically? Who stood to lose?
OT I talked to a friend in HR at WB and they are laying off people here in Charlotte. I think it was in the thousands.
Charlotte so far seems to be doing alright. Everyone is still eatting out for lunch
Dow is testing 11700 for the third time during this bear rally. If it fails to puch through, I predict this rally is done.
Chart 32 is the money chart, no doubt.
TCA - Wait for the next news break and 11700 will happen.
Perhaps it will be:
"Massive layoffs on Wall Street after XYZ firm files for Chapter 11"
David Pearson writes:
... cash rental yields that compensate investors for risk. Something on the order of 8% should do it.
The problem is that it isn't just risk but risk and uncertainty. Investment real estate is a long term commitment and the uncertainty of future prices allowing competitors to undercut and the uncertainty of taxes and inflation and other government changes demands a really steep premium right now.
"92% of loans over 90% LTV have credit enhancement."
Two questions occur. (1) What is the CLTV or TLTV of these loans and (2) Who, preytell is the counterparty with credit enhancement? On second thought I don't want to know its too depressing.
Freddie and Fannie are conforming only. Places like SF/Pen/San Jose and NoVa were mostly non-conforming loans; probably upwards of 75%.
These areas have thrived off cheap credit, exotic mortgages, and buyers moving up the food chain. Prime borrowers required Alt-A which required Subprime; all of which required appreciating home prices. Start cutting away at that base and see what happens; eventually everyone will feel the pinch.
At the same time the lines between what was considered prime versus the others started to blur and pretty soon everything became A-paper.
So what? Shareholders who were foolish enough to ride that beast will lose and American taxpayers will protect their bond holders so they can continue to wtite mortgages. I think the stock market has moved past this.More banks go down, more homebuilders bite the dust and more lenders get burnt it's just too bad. Not that I agree with these principles but the pigs always get fatter and the bulls always run sooner or later.
just got back from a short vacation. it does not matter what the hell FRE has on it's books or what happens to it. If it starts going bad, they'll just move it to level 3 and forget about it. I've given up on anything happening to F&F. The guvmint will bail 'em.
One thing people should know:
Despite the rally in equities, mortgage bond spreads are widening over fears that Freddie could shrink its rmbs retained portfolio. This has a nefarious effect on 10/30 year Treasury yields. As spreads widen (and as prepays fall with higher rates and less home equity), the duration (the projected life until prepay) of RMBS increases. To hedge the higher interest rate risk, owners of RMBS have to short more Treasuries, which of course raises interest rates and further pushes up the duration of RMBS.
Another negative positive-feedback loop for the market to contend with.
mock turtle writes:
then gold will phoenix
I've got a sack of Krugerrands and Sovereigns and a prayer that you are correct. This latest move has me chugging immodium though.
unearthly,
"places like SF/Pen?/San jose and NoVa were mostly non conforming loans."
True, but what about Sacramento, Stockton, Bakersfield, Modesto, Oakland, Las Vegas, Phoenix, etc. etc. etc.
That's why Freddie should have a 40 year moratorium on foreclosures. ( remember Moses?)
P.S. And meanwhile the investors would make tons of money-acording to Freddie and our great leader Tanta.
My point is that lower priced areas were propping up the higher priced area because homes were 'appreciating' and credit was cheap. Falling home prices in the outer areas (Stockton/Merced/Tracey) will most certainly have an effect on the close in areas (Walnut Creek/Fremont/San Jose) as the move-up buyer pool shrinks. Throw in a tight credit market and look out.
Jeebus Broker yer sounding like a broken record already...save some of it for FNM earnings release on Friday morning!
Anon,
Oakland is also largely non-conforming. Nicer neighborhoods have extremely high prices, still, though lower than SF. Rougher neighborhoods were sub-prime, because only people with no options would live there. Proximity to SF and U.C. Berkeley causes high values in the upper end Oakland neighborhoods. Stupid flippers bought in terrible neighborhoods, believing that prices always go up. Now their stuck and foreclosing.
I concur with Fair Economist on the comment Brian made: "Chart 32 is a great graphical depiction of moral hazard in action." Brian remains awesome, btw, but this comment was a little off.
It's not like there's been some sort of incremental growth in the presence of moral hazard each year; it's always been there. I suppose one could argue that we went from implicit to explicit, but that was a 2008 event.
The English word mortgage shares a Latin root with words which deal with death such as mortal or mortify. The Latin root is mors which literally means death. Mortgage takes its meaning from the Old French word for dead pledge. nuff said
Swedish Chef, Anon,
My point is FRE FNMA have significant conventional loan exposure in Northern Californi.
I was painting with a broad brush. More specifically in Oakland, Richmond, Emeryville, San Leandro, Albany, El Cerito. And on the San Francisco side, South San Francisco, Daly City, San Bruno, Burlingame, San Mateo, Redwood City to name a few. All these areas to one degree or another had the far out suburbs that were a stretch for comuters, but offered first time home buyers a chance for the dream. Don't know why SF area residents think their area is immune from the housing collapse.
No one is arguing that the GSE's don't have significant exposure, it's just that non-conventional home loans represent a much larger piece of the pie in the Bay Area. As such exotic mortgages were much more common. When that segment starts failing, and it will, the effects will dwarf the conventional loan failures.
Here ya go CSC:
YouTube - Nirvana - Immodium 12/01/89
JP, Fair Economist, DP, Schnaps,
It would be helpful to see the up to date 2006 vintage DQ curve to settle the question. My guess is they have accelerated some, but are no where in the vicinity of 2007.
If you look at the stats of the 2007 books for the GSEs, there is a pronounced deterioration in the quality of loans (by origination stats) that went on the books between roughly Mar and Nov of 07. And there is little doubt in my mind that they stepped in to take on these loans when the private securitizations started to freeze up. (I'll look for the stats and ask CR to post them if I can find them) It is very clear adverse selection, and if you don't think political pressure had something to do with it, I have a few bridges in my neighborhood I'd like to sell you.
randy writes:
"I've given up on anything happening to F&F. The guvmint will bail 'em."
FWIW:
Reconstruction Finance Corporation (RFC)
Britannica Concise Encyclopedia | Date: 2007
"U.S. government agency established (1932) to provide loans to railroads, banks, and businesses. The RFC was an attempt by Pres. Herbert Hoover to counter the early effects of the Great Depression by rescuing institutions from default. It was widely used by Pres. Franklin Roosevelt in the New Deal."
And the F&F rescue will be followed by the Ford/GM/Cerberus rescue, then the homebuilders.
Looks to me like the depression is already here, hiding in plain sight.
CR,
Aren't there some origination standards for Alt-A?
I mean, wouldn't true fraud or gross negligence in origination lead to originator liability (and perhaps personal liability or criminal liability given the special status of Fannie/Freddie)?
It seems to me that by 06 and 07 a great many Alt-A originators were so sloppy or corrupt that there is, in point of fact, a civil (and perhaps criminal) case to be made against them.
The originators' business entities have, to coin a term, "imploded" (ahem) but the individuals behind these entities still have a lot of personal wealth that can be pursued.
Any thoughts?
Who was the assclown that posted to me that FRE wasn't like CFC and WM and WB and all the rest. They are all loaded up with CRAP easy money mortgages, that is why we are in trouble. PERIOD.
SR
AC
I also found the carry trade action freakish today as USD:JPY steam-rolled through major overhead resistance as though it wasn't there, and the money went nowhere. 95% of the time a move like that indicates a big stock rally.
Could the hedges be leveraging shorts? Wow. That is actually a cool concept. I don't see why you cannot borrow money to buy SKF, SRS, DUG for example. Hint, Hint...
Financials were weak all day after Freddie revealed its Liar Loan portfolio, now we get AIG after the bell - ready to lay another big stinky egg?
I'm not saying the GSE's didn't start taking more crummy loans in 2007 - I don't really know - just that comparing loan performance from various vintages at different real periods doesn't tell you much when the market has changed so much. California 2004 and 2003 vintages were just awesome at the start but now they're starting to go back at substantial rates. They were weak loans all along but they were held up by the housing prices. Now they're being exposed.
As to political pressure - well there's lots of things here. There's greed for all those loans, social pressure from the financial system (Bernanke, bank CEOs), Congress, and the President. I don't think Syron much cares about congressmen calling - he doesn't report to them. OFHEO can influence things but it answers to the White House, which doesn't care what Congress says. OFHEO's "pressure" has been soft so far - they have lifted a lot of regulatory requirements. But I don't think they've tried to make the GSE's make bad loans, they've just allowed them to. If the GSEs did take on a lot more junk loans in 2007 I think it was basically voluntary.
My personal guess - and we're all guessing unless there's an investigation of the GSEs with subpeona power - is that the GSEs were wheedled by the financial system to save it, and were willing to do it for market share and to prop up their own book. Then they saw the kind of junk they were taking on and started ramping the fees (early 2008). They didn't realize what they were getting into - no excuse, they should have - but it wasn't intentional, done with a Dr. Evil laugh.
"I don't see why you cannot borrow money to buy SKF, SRS, DUG for example. Hint, Hint..."
Don't see much evidence. Volume was fairly steady and SKF tracked well.
stock-regulator, Freddie is reporting 1.4% delinquency at 18 months. There are Alt-A bonds of similar vintage with defaults above 30%. There is a difference. Maybe not enough, but they weren't swimming in the same pool.
While I appreciate the free wheeling nature of the comments and make comments that are not especially important myself, I would like some way to sift through all the comments made to get to the ones that really make a contribution to understanding the problem. Is there some way Tanta or CR could flag the important comments?
"Don't know why SF residents think their area is immune from a housing collapse".
Anon- I know why!
It was their unique willingness to believe Realtor tripe about how special the area is, repeated incessantly by the local media, compounded by their inherent belief that they are, indeed special. (smarter, richer and and more sophisticated than your average American- they really, literally believe that).
Same thing in Seattle. A special sort of hubris that can't be topped anywhere in the US, and that includes Central Park West and 5th Avenue.!
A bigger bunch of blowhards you will not find anywhere on the continent.
What's interesting to me is, as the market begins collapsing in these ultra special_ snob appeal markets, the local media gets less of their ad revenue from REIC and actually begins telling partial truths about the market there!
The Seattle Times has begun doing a 180 from it's previous reporting on the local RE market/economy in the past month.
Outside of the "yeah, guess maybe the market here's not as immune as 2 months ago, they actually did a huge multi page spread in the Sunday magazine section on the explosive use of local pawn shops to tide people over for gas and food- people whose mortgages were in the several K a month range.
Now, any idiot with a Zip Realty account could have been watching this market deteriorate for the past year and a half.
But these people refuse to be "confused by the facts" until the fit really starts hitting the shan.
jim- learn to speed read- skim til you get to the stuff you think is important.
It's a skill ,I think, that can be developed like any other skill.
No better place in the world to practise developing those skim reading skills than the comment sections of blogs, especially when the comments have gone from 40 to 200 in the past year.
Great skill to have too. Good luck!
FE - I know there is a difference FRE and FNM are not AS bad as CFC and WM and the like BUT their alt-a loans are the SAME. They will default at the same rate.
You all keep thinking these are still the quiet companies they were 6 years ago and you all would be WRONG.
But I am sure Tanta will have a silly post defending them or badmouthing the MSM soon and all will be well.
SR
jim,
maybe that is why comments are rated on other sites like mish's? i never quite knew the purpose.
To answer two questions at once: credit enhancement is usually mortgage insurance, provided by the private MIs like MGIC, PMI, and yes, AIG.
Note the decline in credit enhancement on page 28, from 2005 to 2006. What I have been told is that normally when the GSEs bought a pool of Alt A loans, they would get an MI pool policy to cover a lot of the risks. In 2006, Fannie continued that practice, but Freddie decided that, nah, MI wasn't worth the cost, so stopped buying coverage for awhile.
Doh.
ghostfaceinvestah, it'll turn out to be a good call if the MI's go BK. I'll be pretty interested to see what RDN's results are on Monday since they were more aggressive on quality than the others. Going after all those NIMs finally burned them.