If a majority of Americans would benefit from a financial dustbowl to get out from under all this debt...can we expect some political ploy like, say, a massive devaluation of the dollar?
I was a regular commenter on your wonderful site until late last year, after which I kinda disappeared without saying goodbye, which is rude. I apologize. Fact is, I got diagnosed with ovarian cancer and I have been in the process of working myself out of "cancer patient" status and into "cancer survivor" status. It's a long and drug-filled road, and I have surgical scars that look like some of your more interesting graphs. However, I'm getting more and more able to sit up at a desk and do non-essential things like surf the web and revisit some old favorites, so here I am. I sure hope you've been doing better than I have.
Back to business: the mortgage insurers can raise rates all day long and it won't do dog for them or anyone else. The whole problem is, precisely, that the "piggyback" mortgage was designed to get around MI. As long as there are second-lien lenders willing to price them cheaper than MI--and perhaps we're seeing the beginning of the end of that--the MIs just lose business entirely in a credit bubble, since they've been burned before and haven't been willing to follow the pricing down to ruin again. They remember the early 90s better than the regulators do (or did, maybe).
The real point is they have two dogs in this fight: they have lost market share because competitors (second lien and 100% lenders) have been willing to underprice risk, and they are at risk for the book of business they do have because increasing foreclosures and bubble-deflating in their market areas drag down values on insured as well as uninsured collateral. A lot of lenders and RE brokers have been dismissing the MIs for years now on the grounds that they're just crying over lost business, but in my unhumble opinion the MIs have been pretty good risk managers in an irrational market for a long time, meaning they're damned if they do and damned if they don't. The fact that their interest in all this isn't quite public-spirited altruism doesn't mean they aren't right. (If you remember, I've often made that argument about Fannie and Freddie.)
As I have been saying for years now, the reports from the MI companies ought to scare the crap out of Alt-A RMBS holders, but it never seems to. If the sector of the industry whose whole function is to underwrite default risk won't touch that stuff at the (then) current market price, what makes anyone think the risk is adequately managed by a structured security? What are we going to do here, "make it up on volume"? (Inside joke: mortgage lenders always think they can keep slicing off risk premiums and "make it up on volume.")
The chickens are coming home to roost. The effects will not be pretty, but I have to admit that both personal and professional circumstances are conspiring to make me say: I TOLD YOU SO! I TOLD YOU SO! I SO TOLD YOU SO!
There. I think I got that out of my system. Nice to be back, CR.
Excellent post, Tanta. The DC area is starting to feel some pressure for anyone who bought in the last two years. Two houses on my street in Potomac were both "under contract" since early June... both within the last three weeks are now "For sale". Not anecdotal for America, but nothig is moving in my area. Toxic loans have destroyed housing affordability in NoVA, DC and Maryland.
First, Tanta. Welcome back though I wasn't an early reader but thanks much for that post. Quite enlightening, though frightening. You've just sketched in the specifics for a particular market of the classic speculative implosion.
Second, CR - wherever do you get this stuff ? Thanks for posting this I think. The gist of it - to simplify and check - seems to be that high-leverage, high-risk mortgage traffic has continued despite all the warnings against it and the economic warning signs ? And is an increasing part of the mortgage population ? That's my take.
Do we have any feel for how much of the universe of mortgages is exposed to implodables ? And what the rate mechanics are, that is what're the likely trigers and cascades for a sequence of defaults ? Or just how big is this problem ?
Thanks, Greg. I don't get out as much as I used to, but every day the temperature stays under 95 I walk the half-mile down my street in Upper Marlboro (MD) to the Starbucks for a decaf latte and a copy of the Washington Pest, and then totter back again. Last weekend I counted four open house signs in that half-mile of townhouses and condos interspersed with apartment complexes. Open houses? This time last year they were getting five offers sight unseen within minutes of listing. Two of the signs looked hand-made, too. Not a good sign, as it were.
I also just got another flier from my apartment complex manager yesterday, offering to pay a $200 bounty for referral of a new renter. Hmmm. Rental vacancies on the same street with sluggish single-family sales. So much for that "housing shortage" argument . . .
I think this is a case of the MI people crying wolf because there is a pack of wolves outside their door and they look like they're getting ready to come in.
There is, of course, no mystery now as to what the problems are for car dealers. They are pinched by the slumping real estate market because people can take less money out of home equity to buy cars. And soaring gasoline prices have made driving much more expensive and new-car payments more burdensome. In July, sales at gasoline stations accounted for 10 percent of all retail sales, the highest figure in decades.
That 10% of all retail sales was stunning to me. Dont know where he got that from, but 10% of retail sales going to buy gas has to be taking a chunk out of peoples budgets.
And it seems he jumps pretty quickly from home equity to car buying.
Also, a ton of news items on a report by Freddie Mac, this one from Reuters
This year, Americans who refinance their mortgages are expected to draw $257 billion of wealth out of their homes, according to mortgage finance giant Freddie Mac.
Not being a home owner and never involved in financing one, but I wonder how it works: Do you refinance based on the value of the home? What if that value is inflated? Do you get into trouble if you borrow based on a high value and then have a problem if you cant sell it for that?
I am not so sure it is MI won't offer coverage as buyers aren't interested in it. After all, it only covered the lender not the buyer anyway, so it was in the lender's interest not the buyer's. They are hoping new lending contraints will provide them with some business that they have largely lost.
Have a look at Table 3-15. In spring 2005 about 12% of owner occupants had (self-estimated) current loan to value ratios above 90% - that would be your high risk contingent. The focus on toxic terms is a little overstated - if you have an IO ARM and you've made a 30% down payment you aren't at immediate risk - payment shock will force you to sell, or refi if you can, but not get foreclosed upon. But if you have a 30 year fixed and have made no down payment you are at substantial risk.
Since prices may have fallen a bit since the survey, and MEW proceeds apace, the current numbers are probably a little higher. Of course, these are only for owner-occupants. Anyone know a good estimate of the stock (not the flow) of investors, and what the LTVs look like for those loans?
Calculated Risk:
"I'm not familiar with the mortgage insurance business, but I wonder why the insurers don't just raise their rates for riskier mortgages?"
I suspect the answer has to do with a house of cards. Anyone know if there's a reason they can't?
I also suspect any action reigning in risky loans at this point will crash the house. Perhaps the industry wants to be able to point to someone else after the fall.
We were buying groceries at the Giant in Falls Chirch, VA today. The man in front had his debt card fail due to lack of funds. He used a cc to pay.
I asked the checker "do a lot of people pay with cc's?" her reply was "yes." I pressed her a little and almost all grocery sales are cc and it has only been lately.
K-Dawg, thanks - I missed that article. I looked at the data yesterday and it was about what I expected.
In California, Construction employment fell 2,100 jobs - that is 15,100 below the peak of 935,500 construction jobs in Feb of this year. Thornberg has estimated California will lose 200,000 construction jobs in this cycle, so the layoffs have probably just begun.
I'm just a very average guy who reads this blog to educate myself for what I suspect is a day of reckoning for "our" economic sins.
Would you all be so kind as to share some of your collective wisdom with me? As a median wage person who has saved the equivalent of two years wages in an IRA cd account over the last 25 years of work, is there anything I can do to protect my families savings from the destruction of the dollar... or are we all going to econnomic hell. I'm not looking to make a profit just avoid destruction? We dont own stocks nor bonds. thank you
otsosmart, I don't give specific investment advice on this blog - sorry.
But let me say I don't believe we are headed for "economic hell". A recession is very possible - maybe even a severe recession as forecast by Roubini and others - but if you can keep your job you should be fine, and the economic waters will be smooth on the other side of the storm.
The last phrase is a riff on Keynes:
"Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again."
J. Maynard Keynes, A Tract on Monetary Reform (1923) Ch. 3
For most individuals their primary concern should be job security during this possible "tempestuous season". For policy makers and investors, Keynes admonition is on point.
Thanks for the kind words. My treatment isn't over yet, but I have every reason to think I can survive this. My hair might even grow back, at which point the blonde jokes can resume. (Right at the moment I get nothing from my more irreverent friends except bald jokes. It is possible, I discover, to get tired of people trying to sing "Dude Looks Like a Lady" backwards. Sure, it was funny the first time, but that could have been the drugs. At least they've stopped calling me "Captain Picard.")
(There are people--possibly on this very comment thread--who are scandalized by an irreverent attitude toward cancer. My advice? Get over it. Cancer doesn't deserve reverence, and patients who keep a sense of humor withstand the treatment a lot better than those who don't. As Emma Goldman once said, if I can't dance I don't want to be part of your chemotherapy. Or words to that effect.)
Being unable to find a witty segue from alopecia to mortgage insurance, I'll just have to wade right in: the thing I found really most interesting about the letter from MICA is that they've finally come right out and said what is the dirty little secret of the whole regulatory problem: that the regulators keep issuing "guidance," instead of "regulations" that have "penalties." Anyone who has spent any time around a financial institution knows that if you don't threaten to fine our corporate asses, throw our directors and officers in jail, and raze our newest branch office to the ground and sow salt in the parking lot, you are not likely to capture our attention with a bunch of politely-phrased "guidance," especially if the behavior you are "guiding" has (or appears to have, in the short run) some serious potential for keeping the share price from tanking. Unfortunately, since pigs will fly before the Federal Reserve puts teeth into anything, this "nontraditional mortgage" problem will wind down not by means of "regulatory intervention," but by means of that old free-market standby known as "the bailout" of a couple of vulnerable depository institutions. It won't, I think, be the big megabanks, but yes, I think this problem is bad enough to put a few smaller banks and California thrifts into receivership. And if a significant portion of all those ABS and RMBS stuffed with iffy home equity loans starts to perform the way I think it will, Mr. Bond Market will be in for a Really Bad Day, too. As CR says, this doesn't necessarily mean "economic hell"; it's more like a serious dose of economic purgatory. But if I remember my elementary school education correctly, even purgatory has flames . . . I don't want to be either to melodramatic or too pessimistic, but if anyone here has an alternative theory of "market correction" that involves the banks getting out from under this mess entirely unburnt, I'd love to hear it.
MICA might be outing one dirty little secret, but what about the other one? The fact that the guidance only applies to depositories, and a lot of this stuff is coming from non-depository lenders?
Well, yes, but clamping down on the depositories would have the effect of clamping down on everybody downstream.
Non-depositories, by definition, don't make loans with their own money. They use warehouse lines of credit to fund mortgages, and then sell those mortgages on the secondary market. Who makes warehouse loans to mortgage lenders? Banks. Who buys all these "nontraditional" mortgages that Fannie and Freddie won't? Banks.
Sure, banks turn around and securitize these puppies, and sell the securities, but they are selling the investment grade tranches. The first-loss subordinates stay on the banks' books, in the absence of a greater fool. And who retains or buys the servicing rights? Banks.
The best way to control the practices of non-depository lenders is to control the acquisition practices of the depositories, in my view. It's certainly more efficient. If, say, depositories had a regulatory-imposed limit on the number of Option ARMs they could purchase from or service for correspondents, then correspondent originations of that product would decrease. The depositories would manage the pipeline limitation by tightening credit standards or raising prices on the most marginal stuff or both. Correspondents and brokers would have to either quit writing the truly ugly loans, or find some other source of capital that also has the operational wherewithal to handle secondary market transactions and service mortgage loans. There aren't that many outside the world of depository institutions. There's GMAC, of course, which is a huge non-depository buyer and servicer of mortgage loans. How long would the shareholders of GM--not to mention the rating agencies and stock analysts--put up with GMAC becoming the lender of last resort? "Longer than you would believe" would be my first guess, but eventually they'd have to follow the depositories.
And yes, all that would take a long time to sort out, which is why the Fed should have started it at least a year ago. They didn't, which is why I think the winding down of the banks' positions is going to be so nasty. I don't see the RE market holding out long enough. It isn't just consumers who look like they have equity "on paper." The "paper values" that make homeowners look "wealthy" are the same ones that make bank portfolios look "collateralized." If the day comes when those portfolios have to write down their appraised values, which forces up capital requirements and loan loss reserves, which eats into profits, they won't have to lose actual money on actual foreclosures to get scorched. If, however, once scorched, they then start losing actual money on actual foreclosures, they get burnt.
Someone upthread pointed out census figures showing estimates of only 12% of outstanding mortgages having LTVs above 90%. Sounds okay until you realize how much money 12% of around ten trillion dollars is.
Speaking of some banks possibly needing to be bailed out, has anyone made a list of which banks/lenders are most exposed to a housing downturn? Specifically, which institutions should prudent savers not keep their savings in? Thanks!
I agree with you that if the regulators cracked down on warehouse lines that the game would be up, but how likely is that? With one exception they are responsible for safety and soundness, not consumer protection. If they did try to restrict warehouse lines wouldn't the obvious response from the regulated institutions be a) 'the borrower doesn't hold the loan long enough to be exposed to credit risk - hell, the big risk in warehouse lines is that the borrower won't close, not that the borrower closes and defaults, and b) our warehouse line is less than 2% of our capital so how is this a safety and soundness issue? The only place where they have a consumer protection role is Fed enforcement of the Truth in Lending Act, and all that requires is disclosure.
As far as junior tranches go, I thought a fair amount of that was getting sold off to Wall Street - not all, but a fair amount. That or whole loans were getting sold off, with some credit support, but with real risk transferred to the buyer.
And I'm the one who said 12%. Not "only" 12%, no commentary on the magnitude was in there. Just the number. Whether 12% is big or small depends on your perspective. If 50% of those loans went bad in a 3 or 4 year period it would amount to less than 2% per year. Not enough to trigger the waves of domino effect foreclosures that some housing bears see (at least not at the national level - where it's concentrated, in places like San Diego ...). But it would be awfully painful for those borrowers, and would put whatever part of the financial system is holding all that paper into a world of hurt.
I am buying way out of the money long dated puts on the big banks. They seem so cheap as the large banks like Wells Fargo and BofA are hitting new highs.
Tanta's back!
"Anyone who has spent any time around a financial institution knows that if you don't threaten to fine our corporate asses, throw our directors and officers in jail, and raze our newest branch office to the ground and sow salt in the parking lot, you are not likely to capture our attention with a bunch of politely-phrased "guidance," especially if the behavior you are "guiding" has (or appears to have, in the short run) some serious potential for keeping the share price from tanking.""
You are forgetting REITs. I don't think banks do control this business any more.
There has been a significant shift in the whole mortgage market within the last five years, and the result is that the agencies have lost a lot of their clout.
Since prices may have fallen a bit since the survey, and MEW proceeds apace, the current numbers are probably a little higher. rc helicopter Tactical Flashlights video game
The biggest issue facing our nation today (perhaps) is consumers overloaded with debt. A mountain of debt affects so much in our lives. Our savings rate is increasing, finally, but is it a little too late?
Well, if that's not a shot over the bow.... We may have a problem here folks!
Rold me Raggy - I'm rared!
privatebanker, after reading this letter and the WaPo article (previous post), I think the situation is worse than I feared.
Best to all.
Thanks for all that. It's just too complicated. Does that make me dumb?
If a majority of Americans would benefit from a financial dustbowl to get out from under all this debt...can we expect some political ploy like, say, a massive devaluation of the dollar?
privatebanker, Not so much a shot over the bow as it is more like waiting in line for a lifeboat on the Titanic.
Hey, CR. I hope I find you well.
I was a regular commenter on your wonderful site until late last year, after which I kinda disappeared without saying goodbye, which is rude. I apologize. Fact is, I got diagnosed with ovarian cancer and I have been in the process of working myself out of "cancer patient" status and into "cancer survivor" status. It's a long and drug-filled road, and I have surgical scars that look like some of your more interesting graphs. However, I'm getting more and more able to sit up at a desk and do non-essential things like surf the web and revisit some old favorites, so here I am. I sure hope you've been doing better than I have.
Back to business: the mortgage insurers can raise rates all day long and it won't do dog for them or anyone else. The whole problem is, precisely, that the "piggyback" mortgage was designed to get around MI. As long as there are second-lien lenders willing to price them cheaper than MI--and perhaps we're seeing the beginning of the end of that--the MIs just lose business entirely in a credit bubble, since they've been burned before and haven't been willing to follow the pricing down to ruin again. They remember the early 90s better than the regulators do (or did, maybe).
The real point is they have two dogs in this fight: they have lost market share because competitors (second lien and 100% lenders) have been willing to underprice risk, and they are at risk for the book of business they do have because increasing foreclosures and bubble-deflating in their market areas drag down values on insured as well as uninsured collateral. A lot of lenders and RE brokers have been dismissing the MIs for years now on the grounds that they're just crying over lost business, but in my unhumble opinion the MIs have been pretty good risk managers in an irrational market for a long time, meaning they're damned if they do and damned if they don't. The fact that their interest in all this isn't quite public-spirited altruism doesn't mean they aren't right. (If you remember, I've often made that argument about Fannie and Freddie.)
As I have been saying for years now, the reports from the MI companies ought to scare the crap out of Alt-A RMBS holders, but it never seems to. If the sector of the industry whose whole function is to underwrite default risk won't touch that stuff at the (then) current market price, what makes anyone think the risk is adequately managed by a structured security? What are we going to do here, "make it up on volume"? (Inside joke: mortgage lenders always think they can keep slicing off risk premiums and "make it up on volume.")
The chickens are coming home to roost. The effects will not be pretty, but I have to admit that both personal and professional circumstances are conspiring to make me say: I TOLD YOU SO! I TOLD YOU SO! I SO TOLD YOU SO!
There. I think I got that out of my system. Nice to be back, CR.
Excellent post, Tanta. The DC area is starting to feel some pressure for anyone who bought in the last two years. Two houses on my street in Potomac were both "under contract" since early June... both within the last three weeks are now "For sale". Not anecdotal for America, but nothig is moving in my area. Toxic loans have destroyed housing affordability in NoVA, DC and Maryland.
First, Tanta. Welcome back though I wasn't an early reader but thanks much for that post. Quite enlightening, though frightening. You've just sketched in the specifics for a particular market of the classic speculative implosion.
Second, CR - wherever do you get this stuff ? Thanks for posting this I think. The gist of it - to simplify and check - seems to be that high-leverage, high-risk mortgage traffic has continued despite all the warnings against it and the economic warning signs ? And is an increasing part of the mortgage population ? That's my take.
Do we have any feel for how much of the universe of mortgages is exposed to implodables ? And what the rate mechanics are, that is what're the likely trigers and cascades for a sequence of defaults ? Or just how big is this problem ?
Thanks, Greg. I don't get out as much as I used to, but every day the temperature stays under 95 I walk the half-mile down my street in Upper Marlboro (MD) to the Starbucks for a decaf latte and a copy of the Washington Pest, and then totter back again. Last weekend I counted four open house signs in that half-mile of townhouses and condos interspersed with apartment complexes. Open houses? This time last year they were getting five offers sight unseen within minutes of listing. Two of the signs looked hand-made, too. Not a good sign, as it were.
I also just got another flier from my apartment complex manager yesterday, offering to pay a $200 bounty for referral of a new renter. Hmmm. Rental vacancies on the same street with sluggish single-family sales. So much for that "housing shortage" argument . . .
I think this is a case of the MI people crying wolf because there is a pack of wolves outside their door and they look like they're getting ready to come in.
This is not going to end well.
Dear CR and others
Just checking in
Pretty gloomy stuff here, seems like there should be a little Dutch boy around, although I wonder about the size of the water behind this dike
Interesting take by F. Norris in the New York Times, A Car-Sales Indicator Suggests a Recession Is Near or Already Here. August 19, 2006
OFF THE CHARTS; A Car-Sales Indicator Suggests a Recession Is Near or Already Here - NY Times
The last line:
There is, of course, no mystery now as to what the problems are for car dealers. They are pinched by the slumping real estate market because people can take less money out of home equity to buy cars. And soaring gasoline prices have made driving much more expensive and new-car payments more burdensome. In July, sales at gasoline stations accounted for 10 percent of all retail sales, the highest figure in decades.
That 10% of all retail sales was stunning to me. Dont know where he got that from, but 10% of retail sales going to buy gas has to be taking a chunk out of peoples budgets.
And it seems he jumps pretty quickly from home equity to car buying.
Also, a ton of news items on a report by Freddie Mac, this one from Reuters
Business & Financial News, Breaking US & International News | Reuters.com
was typical:
This year, Americans who refinance their mortgages are expected to draw $257 billion of wealth out of their homes, according to mortgage finance giant Freddie Mac.
Not being a home owner and never involved in financing one, but I wonder how it works: Do you refinance based on the value of the home? What if that value is inflated? Do you get into trouble if you borrow based on a high value and then have a problem if you cant sell it for that?
Regards to each!
"smell that smell"
It is toast burning.
I am not so sure it is MI won't offer coverage as buyers aren't interested in it. After all, it only covered the lender not the buyer anyway, so it was in the lender's interest not the buyer's. They are hoping new lending contraints will provide them with some business that they have largely lost.
http://www.census.gov/prod/2006pubs/h150-05.pdf
The American Housing Survey for 2005.
Have a look at Table 3-15. In spring 2005 about 12% of owner occupants had (self-estimated) current loan to value ratios above 90% - that would be your high risk contingent. The focus on toxic terms is a little overstated - if you have an IO ARM and you've made a 30% down payment you aren't at immediate risk - payment shock will force you to sell, or refi if you can, but not get foreclosed upon. But if you have a 30 year fixed and have made no down payment you are at substantial risk.
Since prices may have fallen a bit since the survey, and MEW proceeds apace, the current numbers are probably a little higher. Of course, these are only for owner-occupants. Anyone know a good estimate of the stock (not the flow) of investors, and what the LTVs look like for those loans?
Calculated Risk:
"I'm not familiar with the mortgage insurance business, but I wonder why the insurers don't just raise their rates for riskier mortgages?"
I suspect the answer has to do with a house of cards. Anyone know if there's a reason they can't?
I also suspect any action reigning in risky loans at this point will crash the house. Perhaps the industry wants to be able to point to someone else after the fall.
Tanta,
Your unusually well-informed comments were very greatly missed. I was puzzled as to why you'd stopped posting.
Hope you'll be back with us for a very long time.
Tanta, welcome back! You were greatly missed - I'm sorry to hear about your illness
Thanks for the explanation on mortgage insurance. As I was reading the letter, I was wondering: "Where is Tanta?".
Best Wishes for a speedy and complete recovery.
P.S. The offer still stands - if you'd like a hobby - just drop me an email!
Hi,
We were buying groceries at the Giant in Falls Chirch, VA today. The man in front had his debt card fail due to lack of funds. He used a cc to pay.
I asked the checker "do a lot of people pay with cc's?" her reply was "yes." I pressed her a little and almost all grocery sales are cc and it has only been lately.
interesting...
CR,
Report from L.A. Times about CA employment
State Posts Slim Gain in Jobs in July - Los Angeles Times
K-Dawg, thanks - I missed that article. I looked at the data yesterday and it was about what I expected.
In California, Construction employment fell 2,100 jobs - that is 15,100 below the peak of 935,500 construction jobs in Feb of this year. Thornberg has estimated California will lose 200,000 construction jobs in this cycle, so the layoffs have probably just begun.
Thanks again for pointing me to that article.
Best Wishes.
I'm just a very average guy who reads this blog to educate myself for what I suspect is a day of reckoning for "our" economic sins.
Would you all be so kind as to share some of your collective wisdom with me? As a median wage person who has saved the equivalent of two years wages in an IRA cd account over the last 25 years of work, is there anything I can do to protect my families savings from the destruction of the dollar... or are we all going to econnomic hell. I'm not looking to make a profit just avoid destruction? We dont own stocks nor bonds. thank you
otsosmart, I don't give specific investment advice on this blog - sorry.
But let me say I don't believe we are headed for "economic hell". A recession is very possible - maybe even a severe recession as forecast by Roubini and others - but if you can keep your job you should be fine, and the economic waters will be smooth on the other side of the storm.
The last phrase is a riff on Keynes:
"Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again."
J. Maynard Keynes, A Tract on Monetary Reform (1923) Ch. 3
For most individuals their primary concern should be job security during this possible "tempestuous season". For policy makers and investors, Keynes admonition is on point.
Best Regards.
tanta - take care and be well. Great comments too as usual.
CR & jm:
Thanks for the kind words. My treatment isn't over yet, but I have every reason to think I can survive this. My hair might even grow back, at which point the blonde jokes can resume. (Right at the moment I get nothing from my more irreverent friends except bald jokes. It is possible, I discover, to get tired of people trying to sing "Dude Looks Like a Lady" backwards. Sure, it was funny the first time, but that could have been the drugs. At least they've stopped calling me "Captain Picard.")
(There are people--possibly on this very comment thread--who are scandalized by an irreverent attitude toward cancer. My advice? Get over it. Cancer doesn't deserve reverence, and patients who keep a sense of humor withstand the treatment a lot better than those who don't. As Emma Goldman once said, if I can't dance I don't want to be part of your chemotherapy. Or words to that effect.)
Being unable to find a witty segue from alopecia to mortgage insurance, I'll just have to wade right in: the thing I found really most interesting about the letter from MICA is that they've finally come right out and said what is the dirty little secret of the whole regulatory problem: that the regulators keep issuing "guidance," instead of "regulations" that have "penalties." Anyone who has spent any time around a financial institution knows that if you don't threaten to fine our corporate asses, throw our directors and officers in jail, and raze our newest branch office to the ground and sow salt in the parking lot, you are not likely to capture our attention with a bunch of politely-phrased "guidance," especially if the behavior you are "guiding" has (or appears to have, in the short run) some serious potential for keeping the share price from tanking. Unfortunately, since pigs will fly before the Federal Reserve puts teeth into anything, this "nontraditional mortgage" problem will wind down not by means of "regulatory intervention," but by means of that old free-market standby known as "the bailout" of a couple of vulnerable depository institutions. It won't, I think, be the big megabanks, but yes, I think this problem is bad enough to put a few smaller banks and California thrifts into receivership. And if a significant portion of all those ABS and RMBS stuffed with iffy home equity loans starts to perform the way I think it will, Mr. Bond Market will be in for a Really Bad Day, too. As CR says, this doesn't necessarily mean "economic hell"; it's more like a serious dose of economic purgatory. But if I remember my elementary school education correctly, even purgatory has flames . . . I don't want to be either to melodramatic or too pessimistic, but if anyone here has an alternative theory of "market correction" that involves the banks getting out from under this mess entirely unburnt, I'd love to hear it.
Tanta
MICA might be outing one dirty little secret, but what about the other one? The fact that the guidance only applies to depositories, and a lot of this stuff is coming from non-depository lenders?
mort_fin:
Well, yes, but clamping down on the depositories would have the effect of clamping down on everybody downstream.
Non-depositories, by definition, don't make loans with their own money. They use warehouse lines of credit to fund mortgages, and then sell those mortgages on the secondary market. Who makes warehouse loans to mortgage lenders? Banks. Who buys all these "nontraditional" mortgages that Fannie and Freddie won't? Banks.
Sure, banks turn around and securitize these puppies, and sell the securities, but they are selling the investment grade tranches. The first-loss subordinates stay on the banks' books, in the absence of a greater fool. And who retains or buys the servicing rights? Banks.
The best way to control the practices of non-depository lenders is to control the acquisition practices of the depositories, in my view. It's certainly more efficient. If, say, depositories had a regulatory-imposed limit on the number of Option ARMs they could purchase from or service for correspondents, then correspondent originations of that product would decrease. The depositories would manage the pipeline limitation by tightening credit standards or raising prices on the most marginal stuff or both. Correspondents and brokers would have to either quit writing the truly ugly loans, or find some other source of capital that also has the operational wherewithal to handle secondary market transactions and service mortgage loans. There aren't that many outside the world of depository institutions. There's GMAC, of course, which is a huge non-depository buyer and servicer of mortgage loans. How long would the shareholders of GM--not to mention the rating agencies and stock analysts--put up with GMAC becoming the lender of last resort? "Longer than you would believe" would be my first guess, but eventually they'd have to follow the depositories.
And yes, all that would take a long time to sort out, which is why the Fed should have started it at least a year ago. They didn't, which is why I think the winding down of the banks' positions is going to be so nasty. I don't see the RE market holding out long enough. It isn't just consumers who look like they have equity "on paper." The "paper values" that make homeowners look "wealthy" are the same ones that make bank portfolios look "collateralized." If the day comes when those portfolios have to write down their appraised values, which forces up capital requirements and loan loss reserves, which eats into profits, they won't have to lose actual money on actual foreclosures to get scorched. If, however, once scorched, they then start losing actual money on actual foreclosures, they get burnt.
Someone upthread pointed out census figures showing estimates of only 12% of outstanding mortgages having LTVs above 90%. Sounds okay until you realize how much money 12% of around ten trillion dollars is.
Speaking of some banks possibly needing to be bailed out, has anyone made a list of which banks/lenders are most exposed to a housing downturn? Specifically, which institutions should prudent savers not keep their savings in? Thanks!
Tanta, WELCOME BACK, YOU HAVE BEEN MISSED!
Tanta
I agree with you that if the regulators cracked down on warehouse lines that the game would be up, but how likely is that? With one exception they are responsible for safety and soundness, not consumer protection. If they did try to restrict warehouse lines wouldn't the obvious response from the regulated institutions be a) 'the borrower doesn't hold the loan long enough to be exposed to credit risk - hell, the big risk in warehouse lines is that the borrower won't close, not that the borrower closes and defaults, and b) our warehouse line is less than 2% of our capital so how is this a safety and soundness issue? The only place where they have a consumer protection role is Fed enforcement of the Truth in Lending Act, and all that requires is disclosure.
As far as junior tranches go, I thought a fair amount of that was getting sold off to Wall Street - not all, but a fair amount. That or whole loans were getting sold off, with some credit support, but with real risk transferred to the buyer.
And I'm the one who said 12%. Not "only" 12%, no commentary on the magnitude was in there. Just the number. Whether 12% is big or small depends on your perspective. If 50% of those loans went bad in a 3 or 4 year period it would amount to less than 2% per year. Not enough to trigger the waves of domino effect foreclosures that some housing bears see (at least not at the national level - where it's concentrated, in places like San Diego ...). But it would be awfully painful for those borrowers, and would put whatever part of the financial system is holding all that paper into a world of hurt.
OK so which stocks should we be shortin now?
I am buying way out of the money long dated puts on the big banks. They seem so cheap as the large banks like Wells Fargo and BofA are hitting new highs.
We'll see if it works by 2008....
hello from germany,
great stuff again (as usual) from all of you.
you really can smell fear.
immobilienblasen
Tanta's back!
"Anyone who has spent any time around a financial institution knows that if you don't threaten to fine our corporate asses, throw our directors and officers in jail, and raze our newest branch office to the ground and sow salt in the parking lot, you are not likely to capture our attention with a bunch of politely-phrased "guidance," especially if the behavior you are "guiding" has (or appears to have, in the short run) some serious potential for keeping the share price from tanking.""
You are forgetting REITs. I don't think banks do control this business any more.
There has been a significant shift in the whole mortgage market within the last five years, and the result is that the agencies have lost a lot of their clout.
Several specialized mortgage finance institutions offer mortgage finance commodities to home buyers.
Since prices may have fallen a bit since the survey, and MEW proceeds apace, the current numbers are probably a little higher.
rc helicopter
Tactical Flashlights
video game
Sounds like a sinking ship, but hope not. The economy is a mess and only history will tell us what decisions made were good or bad.
The biggest issue facing our nation today (perhaps) is consumers overloaded with debt. A mountain of debt affects so much in our lives. Our savings rate is increasing, finally, but is it a little too late?