i have to question the accuracy of CR sometimes: "... Tanta posts here occasionally. ..."

occasionally???

correction: Subpoenaed (not supposed) questioning their ratings analysis on Sub-prime mortgage Cos. (New Century in particular)

Tanta,

You were the shy one with terse answers at the edge of the cocktail party, right?

Thank you for that exposition. It answered many a question I've had but not been able to articulate for lack of a historical framework.

Nouriel Roubini gives kudos to CR:
?"But now the subprime and mortgage and credit crunch genie is out of the bottle and no amount of self-serving spin will be able to lock it back in the bottle. So kudos to Shiller, Rosenberg, Calculated Risk, Zelman and a few others who braved early on to say that the housing and mortgage emperor had no clothes.'
RGE - Nouriel Roubini's Global EconoMonitor 

RIGHT ON!!!

and thanks for everything CR & Tanta!

Thank you, this is an excellent explanation of the complacency in the system. So basically we have had a technological advance in finance not dissimilar to the old days of tech stocks and dotcoms. Wow I am really showing my age now.

CSFB report (Zelman) on housing market now available on Bill Cara's site

Neal, I disagree vehemently about it being a time for sadness, reflection and change.

Nothing is smashed yet, just looking slightly less optimistic than usual.
As somebody who has been continuously pilloried for being cynical, I am enjoying being right that this huge housing bubble has proven to be a financial illusion.

Change only happens in this country when enough people suffer and squeal like piggies they have become. Change is good, so embrace it and realize you have been sold down the river with the rest of us. Now bail dammit, not curl up in a ball of sad reflectivity.

Tough words from somebody who actually believes that what comes next will be worse for the masses.

Brilliant Tanta. Superb exposition.

Quite a few weeks ago, Alan Abelson quoted someone as saying that the trouble with the derivatives/hedge fund world was that it could all unravel in a very short period of time.

I very frankly don't see where the support for higher asset prices is going to come from. The only constituency that can save us is the...

...the envelope please...

Chinese.

But they, let me tell you, are going to want something in return.

The hegemony of the United States is over.

"And the whole process is muddled and manipulated by certain folks who have an interest in things remaining “competitive,” which you can bet is quite often code for “unregulated.”

Reminds me of the S&L industry back in the 1980's.

arbogast has it in a nutshell, we are done as a world spanning superpower.

The power of the fisc is awesome when properly employed and ruinious when not. Obviously we are in the not category for reasons that have had entire books written to cover our follies. Well, it shall be interesting to see what shall arise from our ruins.

I see piles of tiles with granite countertops marching across the desert in orderly rows....kinda makes me miss ol' Edward Abbey.

Outstanding taxonomy of the "new" mortgage markets, Tanta. Please continue posting often! Given the last paragraph of your post, I may see some things a little differently.

In the 1980's, the GSE's survived the "ALMO" credit risk scenario (used in the GSEs' capital regulation), when Arkansas, Louisiana, Mississippi, and Oklahoma suffered the oil patch boom/bust. Then, in the 1990's, "steady Freddie" and Fannie made enormous profits by leveraging their borrowing advantage and expanding their retained portfolios enormously, despite steadily decreasing their g-fees.

I understand and applaud your emphasis on standards and efficiency. However, I think having only two "grown ups" in charge of credit standards has led to an enormous concentration of credit and market risk in the portfolios of just two institutions - a serious systemic risk (i.e., Greenspan and Bernanke's comments).

Moreover, the investment banks, hedge funds, etc that have ended up holding the vast majority of the risk from "alternative" mortgage investments clearly understood the risks, even if they chose not to do the required due diligence.

From an "efficient markets" standpoint - full disclosure - I am a finance PhD - I believe the market will self-correct. Investors foolish enough to assume 4-6% appreciation would continue indefinitely will be paying the price.

I suspect borrowers and investors in "traditional" instruments (i.e., "conforming") should not suffer greatly." Alternative" products will become less easily available, and investors will charge a higher premium in the future.

Do you agree with this characterization? Extensions and clarifications of your posts are always welcome.

OT

I see piles of tiles with granite countertops marching across the desert in orderly rows....kinda makes me miss ol' Edward Abbey

AllenM: Abbey was a special person, can't print what he would say about those granite counter tops!

Moreover, the investment banks, hedge funds, etc that have ended up holding the vast majority of the risk from "alternative" mortgage investments clearly understood the risks, even if they chose not to do the required due diligence.

I disagree with that. I don't know if you come from the world of portfolio management but when you manage a CDO, a hedge fund or a client account, you most often love what you do and believe that you're doing your best, and/or that there isn't more you can do and/or that there is more you can do but it only makes a small dent in your performance. It's wrong IMO to state outright that investors "knew the risk they were taking". Quite wrong.

Thanks CR for shedding some light that I joke about already with some co workers. "Terminology degredation"

For example, what is a "Government" loan? FHA and VA, right? Well how about Housing Authority? How about Low Income Census Tract? How about ACORN? Or the Teacher/Firefighter/Nurses advanage lending?

Same thing with close of a loan. Do you mean signing date? Docs returned date? Funding date? System date? Booked date? Filled date? The computer has a spot for all of these, and it cares, even if the conversationist wants to gloss it over.

People come up with their own handy dandy assumptions about these standards, and confusion reigns when people from different sides of the industry, (or even from different departments at the same lender), try to converse about it.

Reuters reported on trading curbs on the NYSE at 3.04pm today.

Thanks Tanta for that exposition of the proliferation of loan varieties and the culture (marketing, administration, regulation) that attends this evolution (devolution, mutation...)[..geeze I'm startin to sound like them].
Once again:
U do a number on unpacking this mess, a growing mess that is generating more heat, and not always more light, from others possessing less equanimity.

Banker:

[We'll get throught his just fine, just like we got through the salad oil scandal, the S&L crisis, and a hundred other things like it. It is the price we pay for the benefits of capit]

Then why all the calls to Dodd's office today?

March 13 (Bloomberg) -- U.S. lawmakers will have to consider providing aid to about 2.2 million subprime mortgage borrowers who are at risk of defaulting and losing their homes, Senate Banking Committee Chairman Christopher Dodd said today.

Banker,

There's a difference between people who have razor sharp wits and those who are deep thinkers. Wall Street finance folks generally fall into the former category. However, I think you're conflating the two groups. Whether someone from the first also falls into the second is completely orthogonal - I know plenty of slow-witted people who produce very deep insights into the structure of complex problems and many seemingly stupendously sharp ones who have no ability to see the big picture.

It would be wrong to assume that an Alt-A borrower = subprime high risk. I say this as one whom has been deemed Alt-A and own an investment property and an primary residence. We make our payments and have never delinquent.

Unfortunately, poor reporting in the mainstream media is lumping good Alt-A borrowers with those whom should have been considered subprime in the first place and now my options will be narrowed somewhat but not eliminated.

The subprime market has been a wonderful shell game where everyone made a lot of money on screwing the poor who thought pursuing the American Dream meant paying too much for a house and too much on the loan and on loans that seemed cheap on paper [well at least for a year or two].

Houses will foreclose, credit will tighten, the Fed will likely have to cut rates, the housing stock will be bought on the cheap, the market will stabilize, more money will be made, and eventually lending standards will be less stringent as there is always money to made as mortgage lending has become like stocks, a transaction driven process where the real motivation is to make money on the sale from all parties involved [and there are a lot] and the sale of the loan itself to yet even more parties.

Surely the wholesale lenders and those handling the sales of those securities knew what they were getting into and to state otherwise either means 1] they are lying] or 2] they are just stupid and smarter managers of liquid capital will put them out of business but fast.

I suspect the lenders whose CEOs sold off a lot of stock recently only to complain about the market are just stupid liars, but smart enough to get out before the market corrects the mistake of placing faith in bad financial management that took the route of short term profit over long term investment.