my vote is for "negative equity" to be the catch phrase for 2008
If we are to believe the correlation of negative equity and people giving up their homes, the catch phrase could become "jingle mail". Or do people who just leave not longer mail the keys to the lender, because the lock is changed anyhow?
Back during the Texas banking crisis in the late 1980s/early 1990s NCNB made a mint picking up distressed Texas banks at extremely low prices. It will be interesting to see if they can repeat that coup in their new incarnation as BofA. I'm not gutsy enough to make a wager either way...
There are a number of Grey Swans out there (they are foreseeable, so they are not black).
Two that make my list are:
On (if I understand them correctly) interest rate swaps. Everyone knows about the default swaps, but an interest rate swap is essentially an insurance policy on prevailing interest rates. From my SEC filings readings, they are more common then the default swaps.
The other one is the junk bond market. And of course here, the well known default swaps help to magnify the problem.
I don't think the housing situation is underestimated because a lot of people really do think it is pretty bad. Even the WSJ can only offer rather half-hearted cheer leading.
After you're finished laughing... why do you think they're saying this, and saying it now?
(CNNMoney.com) -- If you're struggling with a mortgage you got from Countrywide Financial, you may be wondering what Bank of America's takeover plan bodes for your loan.
The short answer is that you could come out ahead.
"I think it's positive for the borrowers," Bruce Marks, chief executive of Neighborhood Assistance Corporation of America said. "There are millions of home owners with unaffordable mortgages. The deal will allow Bank of America to restructure loans to what homeowners can afford."
Marks suggested that Bank of America will be able to help current Countrywide customers where Countrywide can't, because it doesn't give risky subprime mortgages, so it plans to convert them into prime loans.
When the housing crash began, Countrywide found that an increasing number of customers with subprime loans were delinquent with their mortgage payments or facing foreclosure. Bank of America insulated itself from the housing crisis by not participating in subprime mortgages.
According to a Bank of America press release, the company does not plan to originate any subprime loans after the merger is completed.
Remember, too, that lots of people who are underwater on their mortgages will keep paying anyway - probably most. They want to live where they live.
While I have always thought the house price issues are extremely serious, I also know that every crisis gets overblown at some point. Things are never as good or as bad as they might be.
wally, yes. This is a huge unknown right now - and usually in these situations, the fears are worse than the reality.
An exception has been housing for the last couple of years; the reality has consistently been worse than most people's fears. At some point that will flip - but I think Shiller is correct and that the risks from housing are still underappreciated (not the inverse yet).
Congress to be prepared to enact a $40 billion tax rebate for middle-income families 'if the economy continues to weaken'.
The plan includes a $30 billion fund to help homeowners avoid foreclosure, $25 billion to help families with rising energy bills, $10 billion to extend unemployment insurance and $5 billion to invest in alternative energy programs.
Look at the IBs today. If that's not ignorance and denial, what is?
Bear Stearns, Morgan Stanley, Goldman Sachs, they're all headed for the meat grinder. Possibly Citigroup. It's simple arithmetic for those who care to do it.
All of them are going to be VAPORIZED unless sovereign funds, or the Fed, come to their rescue. There's going to be a NEW FINANCIAL LANDSCAPE.
On (if I understand them correctly) interest rate swaps. Everyone knows about the default swaps, but an interest rate swap is essentially an insurance policy on prevailing interest rates. From my SEC filings readings, they are more common then the default swaps.
russell120,
currency & interest rate swaps are the granddaddies of the swaps markets.. as of the 1st half of 2007, the notional amount outstanding was about $350 trillion. That's wayyyy beyond the $45 trillion notional of credit default swaps.
I haven't seen it split out into what the notional is just for interest rate swaps.
Check the ISDA "Survey & Market Statistics" page for historical data.
Not Relevant - There was a report I heard on CNBC(?) that stated that while people shouldn't panic and the CFC mods/workouts would go on, BoA buying CFC would probably actually be somewhat bad news in the long term for homeowners . This was because they would be rebuilding CFC in BoA's image and be focused on agency-quality only origination, not subprime. CR's predicted lending standards-based credit crunch.
On the other hand, I think this is probably the first of the many insolvency crisis forced clean-up mergers to come. Can't wait til the Feds/FDIC get overtly into the act.
"Marks suggested that Bank of America will be able to help current Countrywide customers where Countrywide can't, because it doesn't give risky subprime mortgages, so it plans to convert them into prime loans."
So. BofA has figured out a way to make gold from lead. Or, a silk purse from a sow's ear (with apologies to the Mortgage Pig).
So. BofA has figured out a way to make gold from lead. Or, a silk purse from a sow's ear (with apologies to the Mortgage Pig).
Terry | 01.11.08 - 4:48 pm
No Terry. Bruce Marks has it all figured out. Countrywide only "offered subprime loans."
Bank of America has to convert them...Bruce said so.
CAPITAL RESEARCH AND MANAGEMENT COMPANY 47,659,000
BRANDES INVESTMENT PARTNERS L.P. 45,694,222
FMR CORPORATION (FIDELITY MANAGEMENT & RESEARCH CORP) 40,924,724
NWQ INVESTMENT MANAGEMENT COMPANY, LLC 32,994,439
WELLINGTON MANAGEMENT COMPANY, LLP 25,674,023
Barclays Global Investors UK Holdings Ltd 22,568,589
PZENA INVESTMENT MANAGEMENT, LLC 22,339,949
UBS AG 21,894,303
Allianz Global Investors of America L.P. 21,857,872
LEGG MASON INC. 58,040,325
Brandes has a knack for buying companies as there heading for BK....
The amount of defaults on all flavors of debt as the consumer is finally broken and just the overall drop in the volume of shit people buy as budgets get squeezed from the inflation that is baked-in from the extraordinary amount of time that oil has been hanging around the 70,80,90,~100 dollar range. I mean tis the season for 50-60 oil...at least in the last couple of years. This is supposed to be the cheap season!
yep, two drunks propping each other up...too bad one of them is actually past the LD50 Blood Alcohol Concentration (also known as BAC ironically enough)
I'm sure the cost hurts BoA, but it won't matter in the long term if they can spread it out amongst multiple business lines (the bigger entity can more easily take the hit than mid-sized CFC) and in exchange they get the valuable market share, deposits and retail outlets that CFC built (and they can afford to wait out the crisis). Kinda like Holiday/Amaco buying that cruddy grease ball gas station near the revitalizing inner city neighborhood when the owner has taken on too much debt and gotten in trouble. Sure it sucks in the meantime, but it won't kill them and the pay off once things work out could be nice. Like the site's name says "calculated risk".
interesting. how do you calculate who has no equity?
b/c those who bought 2002 and earlier would still be probably +ve equity even if prices all drop 30%. also we are talking averages. remember the average price in the nation is only down a few % Y.O.Y and this was considered a record
also, i would suspect banks would lose only if they held -ve equity in the house? since a lot of the earlier loans had hefty downpayments with a few years of principal repayment, then a drop of 30% may mean they just end up even?
i.e. if i buy $100k house in 2002, put $10k down, bank loans me 90k. 5 years pass and a few k of principal is paid off (say 5k or so -- just estimating). so my equity is 15k. in 2007 its worth like $200k or so. it would have to go down to 85k before bank loses money?
(i.e. 58% decline?)
i'm just curious where you got your information on aging of loans, debt/equity outstanding for the diff years, maturities, etc.
LOL.. Good point mp. However, I didn't say they were being particularly insightful or frugal about it, just that it is a standard business practice to build market share.
The "risks from housing are still underappreciated" is probably true but I do not believe BAC would have moved on this unless they had assurances from the Fed that the combined entity would be fully supported.
Privatize profits, make liabilities public, that's the mark of US-style socialism not so? We all own the deal, particularly if it goes bad.
Also, in my original post, I was trying to make the point that we can probably expect to see more of these financial entity mergers in the future as the Fed and FDIC try to work out the insolvency crisis behind the scenes. From what I've been reading that's just how things are done in central banking when you've blown past a liquidity crisis and have something worse to deal with - you encourage mergers of insolvent entities with larger/more solvent one, nationalize those that you can't and, above all, stabilize the system. I'm guessing we'll see more of these banking deals in the near future that look like a "kiss-your-sister" transaction.
Anonymous (5:05): That is true, certainly, provided they were wise and didn't withdraw the equity. It's hard for me to assess, since I have never looked at my house as anything other than a place to live, but apparently some folks looked at it as a piggy bank.
That is quite a "who's who" of bagholders ... maybe some new software needs to be written to warn new employees enrolling in 401K's when they are about to choose one of those funds.
It could pop up an image of the tan man running away after he hands you the bag with the doo-doo in it. A WAV file w/the sound of a toilet flushing might also add a nice multimedia touch ...
I saw an interview with Marc Faber and he related how when he was on Wall St in the 1980s he advised his employers to invest in a basket of Texas banks that were trading in the low single figures.
Marks suggested that Bank of America will be able to help current Countrywide customers where Countrywide can't, because it doesn't give risky subprime mortgages, so it plans to convert them into prime loans.
What the hell does this mean? The borrower is still the borrower. It can drop interest rates all it wants, but the risk isn't going away.
Remember, too, that lots of people who are underwater on their mortgages will keep paying anyway - probably most. They want to live where they live.
I have to disagree in the strongest but most respectful terms. This is not the last time or any time before that. People can work numbers and have access to information like never before. They also have little direct experience with the consequences of credit impairment nor the actual transaction costs of real estate deals. Some got in with zero down and no obvious transaction costs. Now they look at years of negative equity while paying twice what renting costs. They aren't going to pay even if they realized the consequences of walking. Then the nail in the coffin; 7% transaction costs. Why pay to sell a house and write a check at closing when walking is easier. 4 million surplus dwelling units nationally are going to massively lower the barrier to renting further exacerbating the problems. People WITH equity are going to walk pursing job opportunities and seeking to build equity with monthly savings rather than gamble on appreciation. We've raised a wily consumer and deserve the behavior we are about to observe.
"Privatize profits, make liabilities public, that's the mark of US-style socialism not so? We all own the deal, particularly if it goes bad."
Yeah that is why we are so agitated about Sovereign Wealth Funds owning part of US companies. That injects the government into ownership. We in the US never commit that sin, now, do we?
you have to understand Ken Lewis's point of view to really understand why he did this deal. ken is very fond of telling investors that he's content to view BAC as being a long-term play on the US and its financial system. his strategy is to weave the company into the very fabric of the US consumer's financial life (savings, payments and borrowings).
he is a long-term bull on the future of the country and has a great deal of faith in the US consumer. he finds the idea that prime consumers will start defaulting on mortgages simply because they are upside down unfathomable.
the genius of his strategy is that by doing the CFC deal, his company will be so ingrained in the financial life of this country (20% shr of mortgages, 10% deposit share, 25% credit card share, 10% debit card share) the company will literally be too big to fail. so his shareholders have a free option on the upside if things turn out to be ok. if not .... well, deposits are FDIC insured.
I've written it before, but I like to hear myself type: When underwater homeowners compare how much Wall St. and Bank CEO's made on their misery, they will happily walk on their mortgages. I even think some will brag about it.
People in my upscale ($700K houses) neighborhood are already happily talking about sticking it to the banks: "They're the dumbasses who loaned me 100%; let them eat the loss."
Anonymous (5:05): Also, don't forget the transaction costs associated with a foreclosure. The lender/servicer has to pay costs to foreclose. There may be delinquent taxes to pay and/or taxes that will come due before they can sell the house. There may be eviction costs. There will be insurance and maintenance costs on the house until it is sold. There may be costs to clean/fix/repair the house before it is sold (people being foreclosed on sometimes damage the property). And, of course, there are the closing costs (real estate commissions, escrow costs, etc.) when the house is finally sold. I'm sure there are other costs, but those are the ones I came up with off the top of my head. So, in your example the house would not have to fall to $85,000 before the bank took a loss.
I don't know why I bothered with the financial aspects of "The Walking Psychosis Syndrome." All you need do is look at a property and ask; "Would the bank lose money if the borrower stopped paying and then walked?" That is your pool of mortgage defaulters and it is huge.
Silly mathematical question here. What EXACTLY to people mean when they say "average declines"? If one borrower loses 20% and a second loses 10% the average loss is 15%. But if their houses started out at 300k and 100k the aggregate losses are a far different thing.
"forced clean-up merger"--more like drunks hoping to prolong the bender by pooling their pennies for another half pint of Night Train The picture in my head is a bunch of drunks shaking awake their passed out friend to drive them home because "he quit drinking an HOUR ago."
Please don't call this a 'merger'. Ken is just pulling over to scrape CFC's flattened corpse off the pavement and throwing it in the back of his pickup.
TJ- I thought Clubber Lang had the key word for '08?
Will it become socially acceptable for upside down homeowners to walk way from their homes?"
But a darn fine question to ask.
This gave me pause. Thx CR.
In some areas they call these leaving the keys on the table.
Kinda wonder about the social dynamics of a block/community of homes where, for the same model, Jack paid $550 but Fred two years later paid $375. And where Jack and Fred are immediate neighbors.
@CR
I have never had reason to criticize any of your economics, nor your data presentation.
So please help me understand the connection between your "If prices decline an additional 10% in 2008,the number of homeowners with no equity will rise to 10.7 million"
and Shiller's "When people see that their houses are worth a lot less than their mortgage balance, they have an incentive to default."
I fully concede the incentive. But I cannot yet see homeowners (your own term, and you are consistently precise with excellent communication skills) behaving according to the incentive.
To make it brief for your valuable time, a lot of people borrowing to buy homes also borrow to purchase automobiles. Automobiles bought on credit make every owner upside down as soon as they drive off the lot. Yet Shiller's Incentive offers less explanation of defaults on auto loans than do the usual suspects of unemployment, expensive illness or overtly poor credit risk before the deal was made.
If you were to tell me that most, if not all, of CFC's mortgages were made to people who couldn't even maintain payments on a car loan, I'd believe you (you deserve that kind of trust and have that clout). But I still don't get attributing the default to the "incentive", not to the original credit risk. A link to an article confirming the correlation between negative equity and default would suffice.
Several differences between auto loans and mortgages:
1) it's not generally possible to rent an auto for 1/3 less than your payments. Since most people need an auto, there's not much to gain by walking on the payment.
2) Auto payments are not enough to drive people into the poorhouse. Payments on a 500K house are hard even on upper middle class people, and there's a lot of middle class people in such homes.
3) If you have to move due to a new job, new spouse, new kid, illness in the family, etc., you can take your car. Your house must be sold. The shackles of homedebtorship don't make life stop.
do the "no equity" numbers include people with "no usable equity"? E.g. even if your home is nominally worth more than the mortgage, withdrawing that equity requires either selling (incurring ~6% transaction costs) or refinancing/getting a HELOC which may not allow 100% LTV. If those people aren't included already any sense on how many people that would add?
The numbers of 'no equity people' in each scenario include everyone with 0% equity and less. CR had a graph of the distrubition of the negative equity. There are a lot of people with 0 to -5% equity.
I find it hard to believe that people who can afford the mortgage are going to mail in the keys because they are 4% underwater - especially if people are calling a bottom after a 20% or 30% decline. If you are 4% underwater at market bottom, you ought to make that up pretty quiickly.
I expect banks are lobbying hard to get new legislation passed that makes it harder (impossible) for people to walk away from a mortgage - all in the name of "helping" the consumer, of course.
psychodave, I suspect two reasons for "homeowners" to walk:
Too many in the recent past have thought of purchasing homes as a financial transaction. They were actually buying call options (with an implicit put) rather than homes. With nothing down, they have nothing on the line. This is different from even 10 years ago.
They know they can rent a home like theirs for lot less. With cars, even if you dislike your payment, you cannot "rent" a car for lower than your monthly payment.
@r0m30
Good link. Maybe I got thrown by CR's use of the word homeowner.
I'd thought those who "thought of home purchase as a financial transaction" (hat tip IvyLeague) were speculators/investors. I understand them walking, easily and quickly. If that's what CR really meant when he used the word homeowner, then I regret taking your time.
@Fair Economist Thanks for responding. I didn't intend to include those under duress of illness, divorce and job loss in my question. I guess I hoped those circumstances would not be so widespread as to threaten the entire banking system. And I can't count the number of great Jeeps that've been sold too soon, and at a loss, and replaced with (yuck) a Toyota due to a new spouse/new child, yet the house survived the life-changing event, including serial job loss of both partners.
One of the reasons people were in homes that cost way more than they could afford (and one of the reasons for the creative finance) was just straight out safety. If a family could reasonably afford a $150k house and was from LA, where exactly do you think they were going to live? Compton? The Barrio?
People felt that they had to put their families in a place where the social fabric had not been ripped asunder, where schools actually taught, where there was actually some kind of security for the 5 or 6 thousand they paid in taxes on the property. Those same people bid up the prices perpetuating the problem. Those same people will walk if they can have the same lifestyle by renting or rebuying cheaper.
Ken is clearly trying to save his job while taking BofA down for a ride. CFC had $105.7 billion in notes payable and $30 billion in loans held for sale (to whom?) at the of Q3. It's insurance book is probably just as bad as its loans. Liabilities from pending and to filed lawsuits are in billions as well.
They probably in for so many warehouse lines to CFC that it's either do or die anyway. God bless (Bank of) America.
One of the reasons people were in homes that cost way more than they could afford (and one of the reasons for the creative finance) was just straight out safety.
I don't buy this. One, the safety issue has been around a LOT longer than this bubble. It was around when prices in LA declined significantly in the 90's for example,
Two, the prices in the unsafe areas (Compton, etc) are even MORE crazy (out of whack with incomes and rents) than in the safe areas!
Three, renting in the safe areas is affordable.
It's not about safety. It's about speculation and fraud. IE a bubble.
I find it hard to believe that people who can afford the mortgage are going to mail in the keys because they are 4% underwater - especially if people are calling a bottom after a 20% or 30% decline. If you are 4% underwater at market bottom, you ought to make that up pretty quiickly.
M-F | Homepage | 01.11.08 - 7:04 pm | #
No, but once they are underwater, or close to it, they cannot refi; and if they are in an ARM at that point, the reset will leave them little other option. Your argument works in a 30-year fixed world; but with 1/3 of recent CA mortgages option-ARMS [http://www.businessweek.com/common_ssi/map_of_misery.htm] (and not even counting other ARMS like 2/28s etc) that jingle you'll be hearing won't be Santa's reindeer.
tonigh, 6 pm, home phone rings, didn't answer it, then cell phone rings, its BofA. "We are just calling our good customers to see if you are satisfied and if there is anything else we can do for you. We notice that you have a savings account that is very low interest rate and we now have a new product with 4.3% interest rate, would you like us to convert your savings account to the new rate"?
Unbelieveable timing, must have been an urgent interoffice memo.
I think Congress has already passed a temporary bill allowing people to walk away without paying the IRS bill. This bills was supportted by Realtors as they only care about the transactions not if it is a short sale, foreclosure, etc.
There is another reason for jingle mail. A REO neighbourhood. Price declines are much larger so almost everybody will be under water and living between a crackhouse and burnout house is no fu
I find it hard to believe that people who can afford the mortgage are going to mail in the keys
Part of the pattern was to qualify borrowers on the teaser rate not the taser rate, 2003-2006, for all classes of loan.
Loans with built-in churn! They're like boomerangs for the brokers!
What could possible go wrong?
For some reason I enjoy watching the various 'accident' videos on youtube, but some are so horrendous in the setup that I have to look away at the critical instant.
I get that feeling with the present situation, at least out here in California.
A link to an article confirming the correlation between negative equity and default would suffice.
psychodave:
more and more research has shown with this credit cycle that the #1 predictor of loss severity is LTV status (not FICO, etc)
I assume that negative equity would be considered a "high LTV" state.
a< href="http://www.marketwatch.com/news/story/analyst-says-loan-to-value-ratios-better/story.aspx?guid=%7B8E58AD1F-2A01-49A6-8221-07B345514851%7D">Link for Dave
Excerpts:
"She added that many individuals previously considered "prime" customers who took on loans with LTV ratios of 80% and higher are performing closer to subprime loans."
[snip]
""High [loan-to-value] mortgage loans is the greatest risk pool of U.S. consumer loans, and Citigroup has the single highest exposure to it," Whitney said."
FFDIC (and other's), this very issue seems absent from the discussion (i.e., are the write downs a charge against pre-tax income and, if so, doesn't this stem the bleeding by 30-40%?)
@Yearning to Learn
Yum! Meredith Whitney! Very helpful link. "We believe LTV analysis will prove far more predictive of not just loss frequency, but more importantly of loss severity"
To all responses:
Your generosity is exceeded only by your patience. I see now that the issue has been covered.
This is a red herring. Transactions all over the economy are often driven by shifting tax losses from an unprofitable entity to a profitable one. In this case, I doubt that BofA will be profitable this year... no profit, no taxes, no tax shifting, no tax break. Of course, the monkeys doing the economic modelling never pay attention to the profitability of their parent company. One of the implied assumptions of i-banking.
Secondly, the interest rate swaps are nothing to worry about. They are the derivatives that allow your 'standard' 30-year fixed rate mortgage to exist. Comparing them to the CDOs and credit default swaps etc is like comparing a sawhorse to a horse.
if the catch phrase of 2007 was "subprime," my vote is for "negative equity" to be the catch phrase for 2008.
And 09's catchphrase will be "uh, you mean I have to pay principal too??"
If we are to believe the correlation of negative equity and people giving up their homes, the catch phrase could become "jingle mail". Or do people who just leave not longer mail the keys to the lender, because the lock is changed anyhow?
"...the risks from housing are still underappreciated.
CR, understatement is your forte.
Back during the Texas banking crisis in the late 1980s/early 1990s NCNB made a mint picking up distressed Texas banks at extremely low prices. It will be interesting to see if they can repeat that coup in their new incarnation as BofA. I'm not gutsy enough to make a wager either way...
There are a number of Grey Swans out there (they are foreseeable, so they are not black).
Two that make my list are:
On (if I understand them correctly) interest rate swaps. Everyone knows about the default swaps, but an interest rate swap is essentially an insurance policy on prevailing interest rates. From my SEC filings readings, they are more common then the default swaps.
The other one is the junk bond market. And of course here, the well known default swaps help to magnify the problem.
I don't think the housing situation is underestimated because a lot of people really do think it is pretty bad. Even the WSJ can only offer rather half-hearted cheer leading.
After you're finished laughing... why do you think they're saying this, and saying it now?
(CNNMoney.com) -- If you're struggling with a mortgage you got from Countrywide Financial, you may be wondering what Bank of America's takeover plan bodes for your loan.
The short answer is that you could come out ahead.
"I think it's positive for the borrowers," Bruce Marks, chief executive of Neighborhood Assistance Corporation of America said. "There are millions of home owners with unaffordable mortgages. The deal will allow Bank of America to restructure loans to what homeowners can afford."
Marks suggested that Bank of America will be able to help current Countrywide customers where Countrywide can't, because it doesn't give risky subprime mortgages, so it plans to convert them into prime loans.
When the housing crash began, Countrywide found that an increasing number of customers with subprime loans were delinquent with their mortgage payments or facing foreclosure. Bank of America insulated itself from the housing crisis by not participating in subprime mortgages.
According to a Bank of America press release, the company does not plan to originate any subprime loans after the merger is completed.
Countrywide borrowers: fear not - Jan. 11, 2008
Mr. Market is now acknowledging the coming recession, but is still in denial re housing. Recognition is going to be a double whammy.
Remember, too, that lots of people who are underwater on their mortgages will keep paying anyway - probably most. They want to live where they live.
While I have always thought the house price issues are extremely serious, I also know that every crisis gets overblown at some point. Things are never as good or as bad as they might be.
ot relevant | 01.11.08 - 4:37 pm
http://thumbsnap.com/v/KG6KF8Md.jpg
Bruce Marks pic in above jpg.
I'm still laughing.
wally, yes. This is a huge unknown right now - and usually in these situations, the fears are worse than the reality.
An exception has been housing for the last couple of years; the reality has consistently been worse than most people's fears. At some point that will flip - but I think Shiller is correct and that the risks from housing are still underappreciated (not the inverse yet).
Best Wishes.
Hillary feels 70B stimulus will do the trick.
Clinton Announces $70 Billion Plan to Bolster Economy (Update3) - Bloomberg.com
Congress to be prepared to enact a $40 billion tax rebate for middle-income families 'if the economy continues to weaken'.
The plan includes a $30 billion fund to help homeowners avoid foreclosure, $25 billion to help families with rising energy bills, $10 billion to extend unemployment insurance and $5 billion to invest in alternative energy programs.
Look at the IBs today. If that's not ignorance and denial, what is?
Bear Stearns, Morgan Stanley, Goldman Sachs, they're all headed for the meat grinder. Possibly Citigroup. It's simple arithmetic for those who care to do it.
All of them are going to be VAPORIZED unless sovereign funds, or the Fed, come to their rescue. There's going to be a NEW FINANCIAL LANDSCAPE.
On (if I understand them correctly) interest rate swaps. Everyone knows about the default swaps, but an interest rate swap is essentially an insurance policy on prevailing interest rates. From my SEC filings readings, they are more common then the default swaps.
russell120,
currency & interest rate swaps are the granddaddies of the swaps markets.. as of the 1st half of 2007, the notional amount outstanding was about $350 trillion. That's wayyyy beyond the $45 trillion notional of credit default swaps.
I haven't seen it split out into what the notional is just for interest rate swaps.
Check the ISDA "Survey & Market Statistics" page for historical data.
Not Relevant - There was a report I heard on CNBC(?) that stated that while people shouldn't panic and the CFC mods/workouts would go on, BoA buying CFC would probably actually be somewhat bad news in the long term for homeowners . This was because they would be rebuilding CFC in BoA's image and be focused on agency-quality only origination, not subprime. CR's predicted lending standards-based credit crunch.
On the other hand, I think this is probably the first of the many insolvency crisis forced clean-up mergers to come. Can't wait til the Feds/FDIC get overtly into the act.
"Marks suggested that Bank of America will be able to help current Countrywide customers where Countrywide can't, because it doesn't give risky subprime mortgages, so it plans to convert them into prime loans."
So. BofA has figured out a way to make gold from lead. Or, a silk purse from a sow's ear (with apologies to the Mortgage Pig).
We all own Countrywide now.
BofA's marriage to Countrywide was arranged, of that much I'm certain.
"forced clean-up merger"--more like drunks hoping to prolong the bender by pooling their pennies for another half pint of Night Trai
The BofA deal is a MONSTROSITY.
So. BofA has figured out a way to make gold from lead. Or, a silk purse from a sow's ear (with apologies to the Mortgage Pig).
Terry | 01.11.08 - 4:48 pm
No Terry. Bruce Marks has it all figured out. Countrywide only "offered subprime loans."
Bank of America has to convert them...Bruce said so.
http://thumbsnap.com/v/KG6KF8Md.jpg
I hope this works out for BoA, but if I banked there I'd be changing banks right now.
Top CFC holder's
CAPITAL RESEARCH AND MANAGEMENT COMPANY 47,659,000
BRANDES INVESTMENT PARTNERS L.P. 45,694,222
FMR CORPORATION (FIDELITY MANAGEMENT & RESEARCH CORP) 40,924,724
NWQ INVESTMENT MANAGEMENT COMPANY, LLC 32,994,439
WELLINGTON MANAGEMENT COMPANY, LLP 25,674,023
Barclays Global Investors UK Holdings Ltd 22,568,589
PZENA INVESTMENT MANAGEMENT, LLC 22,339,949
UBS AG 21,894,303
Allianz Global Investors of America L.P. 21,857,872
LEGG MASON INC. 58,040,325
Brandes has a knack for buying companies as there heading for BK....
The amount of defaults on all flavors of debt as the consumer is finally broken and just the overall drop in the volume of shit people buy as budgets get squeezed from the inflation that is baked-in from the extraordinary amount of time that oil has been hanging around the 70,80,90,~100 dollar range. I mean tis the season for 50-60 oil...at least in the last couple of years. This is supposed to be the cheap season!
http://tinyurl.com/2dpetg
Oil and Gasoline - 6 year chart
Hard to really soak all of this stuff in. But there is no doubt about any of it....it is here/coming/baked-in.
mp,
yep, two drunks propping each other up...too bad one of them is actually past the LD50 Blood Alcohol Concentration (also known as BAC ironically enough)
It's just that the way they're talking it seems we skipped past "Tragicville" and went on straight to "Parody City".
I'm sure the cost hurts BoA, but it won't matter in the long term if they can spread it out amongst multiple business lines (the bigger entity can more easily take the hit than mid-sized CFC) and in exchange they get the valuable market share, deposits and retail outlets that CFC built (and they can afford to wait out the crisis). Kinda like Holiday/Amaco buying that cruddy grease ball gas station near the revitalizing inner city neighborhood when the owner has taken on too much debt and gotten in trouble. Sure it sucks in the meantime, but it won't kill them and the pay off once things work out could be nice. Like the site's name says "calculated risk".
Andrew, the site's name is Calculated Risk, not CALCULATED KLUGE.
interesting. how do you calculate who has no equity?
b/c those who bought 2002 and earlier would still be probably +ve equity even if prices all drop 30%. also we are talking averages. remember the average price in the nation is only down a few % Y.O.Y and this was considered a record
also, i would suspect banks would lose only if they held -ve equity in the house? since a lot of the earlier loans had hefty downpayments with a few years of principal repayment, then a drop of 30% may mean they just end up even?
i.e. if i buy $100k house in 2002, put $10k down, bank loans me 90k. 5 years pass and a few k of principal is paid off (say 5k or so -- just estimating). so my equity is 15k. in 2007 its worth like $200k or so. it would have to go down to 85k before bank loses money?
(i.e. 58% decline?)
i'm just curious where you got your information on aging of loans, debt/equity outstanding for the diff years, maturities, etc.
thanks!
LOL.. Good point mp. However, I didn't say they were being particularly insightful or frugal about it, just that it is a standard business practice to build market share.
What BreakOut said.
The "risks from housing are still underappreciated" is probably true but I do not believe BAC would have moved on this unless they had assurances from the Fed that the combined entity would be fully supported.
Privatize profits, make liabilities public, that's the mark of US-style socialism not so? We all own the deal, particularly if it goes bad.
RW- "We all own the deal, particularly if it goes bad."
But, Conjure and I will have pretty ponies.
RW,
We all own the deal only if it goes bad!
Also, in my original post, I was trying to make the point that we can probably expect to see more of these financial entity mergers in the future as the Fed and FDIC try to work out the insolvency crisis behind the scenes. From what I've been reading that's just how things are done in central banking when you've blown past a liquidity crisis and have something worse to deal with - you encourage mergers of insolvent entities with larger/more solvent one, nationalize those that you can't and, above all, stabilize the system. I'm guessing we'll see more of these banking deals in the near future that look like a "kiss-your-sister" transaction.
Gah! I can't win... no joke, but I bought a $25,000 4 month CD from BoA just an hour before the rumor of the buyout hit the street yesterday.
Talk about your bad timing...
Anonymous (5:05): That is true, certainly, provided they were wise and didn't withdraw the equity. It's hard for me to assess, since I have never looked at my house as anything other than a place to live, but apparently some folks looked at it as a piggy bank.
Drew-I bought one of those 5.45 % 3 mo CDs from CFC. I guess BoA won't be offering deals like that.
Top CFC holder's ...
That is quite a "who's who" of bagholders ... maybe some new software needs to be written to warn new employees enrolling in 401K's when they are about to choose one of those funds.
It could pop up an image of the tan man running away after he hands you the bag with the doo-doo in it. A WAV file w/the sound of a toilet flushing might also add a nice multimedia touch ...
trail,
I saw an interview with Marc Faber and he related how when he was on Wall St in the 1980s he advised his employers to invest in a basket of Texas banks that were trading in the low single figures.
Every one of them ultimately went bust.
Drew-I bought one of those 5.45 % 3 mo CDs from CFC. I guess BoA won't be offering deals like that.
Aheadofthecurve | 01.11.08 - 5:18 pm | #
You know, I would have gotten one from CFC, but I was scared of the tan-man!
Why can't CR just start a bank...I'd donate 100K to the cause. The mortgage pig can be the mascot.
Marks suggested that Bank of America will be able to help current Countrywide customers where Countrywide can't, because it doesn't give risky subprime mortgages, so it plans to convert them into prime loans.
What the hell does this mean? The borrower is still the borrower. It can drop interest rates all it wants, but the risk isn't going away.
Remember, too, that lots of people who are underwater on their mortgages will keep paying anyway - probably most. They want to live where they live.
I have to disagree in the strongest but most respectful terms. This is not the last time or any time before that. People can work numbers and have access to information like never before. They also have little direct experience with the consequences of credit impairment nor the actual transaction costs of real estate deals. Some got in with zero down and no obvious transaction costs. Now they look at years of negative equity while paying twice what renting costs. They aren't going to pay even if they realized the consequences of walking. Then the nail in the coffin; 7% transaction costs. Why pay to sell a house and write a check at closing when walking is easier. 4 million surplus dwelling units nationally are going to massively lower the barrier to renting further exacerbating the problems. People WITH equity are going to walk pursing job opportunities and seeking to build equity with monthly savings rather than gamble on appreciation. We've raised a wily consumer and deserve the behavior we are about to observe.
Re Fed guarantee to BofA re CFC:
"Privatize profits, make liabilities public, that's the mark of US-style socialism not so? We all own the deal, particularly if it goes bad."
Yeah that is why we are so agitated about Sovereign Wealth Funds owning part of US companies. That injects the government into ownership. We in the US never commit that sin, now, do we?
you have to understand Ken Lewis's point of view to really understand why he did this deal. ken is very fond of telling investors that he's content to view BAC as being a long-term play on the US and its financial system. his strategy is to weave the company into the very fabric of the US consumer's financial life (savings, payments and borrowings).
he is a long-term bull on the future of the country and has a great deal of faith in the US consumer. he finds the idea that prime consumers will start defaulting on mortgages simply because they are upside down unfathomable.
the genius of his strategy is that by doing the CFC deal, his company will be so ingrained in the financial life of this country (20% shr of mortgages, 10% deposit share, 25% credit card share, 10% debit card share) the company will literally be too big to fail. so his shareholders have a free option on the upside if things turn out to be ok. if not .... well, deposits are FDIC insured.
"You know, I would have gotten one from CFC, but I was scared of the tan-man!"
Actually, I felt like I was sticking it to him.
I've written it before, but I like to hear myself type: When underwater homeowners compare how much Wall St. and Bank CEO's made on their misery, they will happily walk on their mortgages. I even think some will brag about it.
People in my upscale ($700K houses) neighborhood are already happily talking about sticking it to the banks: "They're the dumbasses who loaned me 100%; let them eat the loss."
Lite RE reading...Dusty Hill's (ZZTop) mansion for sale in the Houston/NASA area...
Houston properties, Houston Open Houses, and New Houston Listings - HAR.com - HAR.com
According to the Nattering Naybob blog the BAC CDSs are trading just 1 basis point less than C.
Anonymous (5:05): Also, don't forget the transaction costs associated with a foreclosure. The lender/servicer has to pay costs to foreclose. There may be delinquent taxes to pay and/or taxes that will come due before they can sell the house. There may be eviction costs. There will be insurance and maintenance costs on the house until it is sold. There may be costs to clean/fix/repair the house before it is sold (people being foreclosed on sometimes damage the property). And, of course, there are the closing costs (real estate commissions, escrow costs, etc.) when the house is finally sold. I'm sure there are other costs, but those are the ones I came up with off the top of my head. So, in your example the house would not have to fall to $85,000 before the bank took a loss.
I don't know why I bothered with the financial aspects of "The Walking Psychosis Syndrome." All you need do is look at a property and ask; "Would the bank lose money if the borrower stopped paying and then walked?" That is your pool of mortgage defaulters and it is huge.
Wasn't it just yesterday that I was reading an article about how KenL was often accused of doing over priced deals.
Then the $2B deal came about and everyone thought he was a genius. 6 months later it was back to people saying ol' Kenny paid too much.
I say 6 months after the merger, about a year from now, this thing goes kablooey.
Cheers,
Yep, the key word for 2008 will be DEFAULT -- consumer, corporate, and even municipal.
Shiller interview on BTV:
mms://media2.bloomberg.com/cache/vg07REUJHWiM.asf
You and I are paying for it. Let me act surprised.
FORTUNE
BofA's awesome Countrywide tax break
Taxpayers to help foot BofA's $4.1 billion Countrywide bill - Jan. 11, 2008
Silly mathematical question here. What EXACTLY to people mean when they say "average declines"? If one borrower loses 20% and a second loses 10% the average loss is 15%. But if their houses started out at 300k and 100k the aggregate losses are a far different thing.
"forced clean-up merger"--more like drunks hoping to prolong the bender by pooling their pennies for another half pint of Night Train The picture in my head is a bunch of drunks shaking awake their passed out friend to drive them home because "he quit drinking an HOUR ago."
I say 6 months after the merger
Please don't call this a 'merger'. Ken is just pulling over to scrape CFC's flattened corpse off the pavement and throwing it in the back of his pickup.
TJ- I thought Clubber Lang had the key word for '08?
Shnaps,
LOL
Cheers,
Woa - I never thought I would see this statement.
Will it become socially acceptable for upside down homeowners to walk way from their homes?"
But a darn fine question to ask.
This gave me pause. Thx CR.
In some areas they call these leaving the keys on the table.
Kinda wonder about the social dynamics of a block/community of homes where, for the same model, Jack paid $550 but Fred two years later paid $375. And where Jack and Fred are immediate neighbors.
@CR
I have never had reason to criticize any of your economics, nor your data presentation.
So please help me understand the connection between your
"If prices decline an additional 10% in 2008,the number of homeowners with no equity will rise to 10.7 million"
and Shiller's
"When people see that their houses are worth a lot less than their mortgage balance, they have an incentive to default."
I fully concede the incentive. But I cannot yet see homeowners (your own term, and you are consistently precise with excellent communication skills) behaving according to the incentive.
To make it brief for your valuable time, a lot of people borrowing to buy homes also borrow to purchase automobiles. Automobiles bought on credit make every owner upside down as soon as they drive off the lot. Yet Shiller's Incentive offers less explanation of defaults on auto loans than do the usual suspects of unemployment, expensive illness or overtly poor credit risk before the deal was made.
If you were to tell me that most, if not all, of CFC's mortgages were made to people who couldn't even maintain payments on a car loan, I'd believe you (you deserve that kind of trust and have that clout). But I still don't get attributing the default to the "incentive", not to the original credit risk. A link to an article confirming the correlation between negative equity and default would suffice.
Several differences between auto loans and mortgages:
1) it's not generally possible to rent an auto for 1/3 less than your payments. Since most people need an auto, there's not much to gain by walking on the payment.
2) Auto payments are not enough to drive people into the poorhouse. Payments on a 500K house are hard even on upper middle class people, and there's a lot of middle class people in such homes.
3) If you have to move due to a new job, new spouse, new kid, illness in the family, etc., you can take your car. Your house must be sold. The shackles of homedebtorship don't make life stop.
psycodave take a look at this
it's a thread from last month when BofA realized that this was a reality.
do the "no equity" numbers include people with "no usable equity"? E.g. even if your home is nominally worth more than the mortgage, withdrawing that equity requires either selling (incurring ~6% transaction costs) or refinancing/getting a HELOC which may not allow 100% LTV. If those people aren't included already any sense on how many people that would add?
None of these facts matter. Wright Model-B says so.
Ken - you want to see the number higher? LOL.
The numbers of 'no equity people' in each scenario include everyone with 0% equity and less. CR had a graph of the distrubition of the negative equity. There are a lot of people with 0 to -5% equity.
I find it hard to believe that people who can afford the mortgage are going to mail in the keys because they are 4% underwater - especially if people are calling a bottom after a 20% or 30% decline. If you are 4% underwater at market bottom, you ought to make that up pretty quiickly.
I expect banks are lobbying hard to get new legislation passed that makes it harder (impossible) for people to walk away from a mortgage - all in the name of "helping" the consumer, of course.
So why exactly is CNNmoney quoting someone (Marks) with an apparent level of financial understanding several notches below that of a jelly donut?
You realize of course that one can sell their own house these days without much trouble. Real estate agents add very little value for the fee charged.
people who can afford the mortgage
Starting premise needs work...
psychodave, I suspect two reasons for "homeowners" to walk:
@r0m30
Good link. Maybe I got thrown by CR's use of the word homeowner.
I'd thought those who "thought of home purchase as a financial transaction" (hat tip IvyLeague) were speculators/investors. I understand them walking, easily and quickly. If that's what CR really meant when he used the word homeowner, then I regret taking your time.
@Fair Economist Thanks for responding. I didn't intend to include those under duress of illness, divorce and job loss in my question. I guess I hoped those circumstances would not be so widespread as to threaten the entire banking system. And I can't count the number of great Jeeps that've been sold too soon, and at a loss, and replaced with (yuck) a Toyota due to a new spouse/new child, yet the house survived the life-changing event, including serial job loss of both partners.
One of the reasons people were in homes that cost way more than they could afford (and one of the reasons for the creative finance) was just straight out safety. If a family could reasonably afford a $150k house and was from LA, where exactly do you think they were going to live? Compton? The Barrio?
People felt that they had to put their families in a place where the social fabric had not been ripped asunder, where schools actually taught, where there was actually some kind of security for the 5 or 6 thousand they paid in taxes on the property. Those same people bid up the prices perpetuating the problem. Those same people will walk if they can have the same lifestyle by renting or rebuying cheaper.
Ken is clearly trying to save his job while taking BofA down for a ride. CFC had $105.7 billion in notes payable and $30 billion in loans held for sale (to whom?) at the of Q3. It's insurance book is probably just as bad as its loans. Liabilities from pending and to filed lawsuits are in billions as well.
They probably in for so many warehouse lines to CFC that it's either do or die anyway. God bless (Bank of) America.
One of the reasons people were in homes that cost way more than they could afford (and one of the reasons for the creative finance) was just straight out safety.
I don't buy this. One, the safety issue has been around a LOT longer than this bubble. It was around when prices in LA declined significantly in the 90's for example,
Two, the prices in the unsafe areas (Compton, etc) are even MORE crazy (out of whack with incomes and rents) than in the safe areas!
Three, renting in the safe areas is affordable.
It's not about safety. It's about speculation and fraud. IE a bubble.
I find it hard to believe that people who can afford the mortgage are going to mail in the keys because they are 4% underwater - especially if people are calling a bottom after a 20% or 30% decline. If you are 4% underwater at market bottom, you ought to make that up pretty quiickly.
M-F | Homepage | 01.11.08 - 7:04 pm | #
No, but once they are underwater, or close to it, they cannot refi; and if they are in an ARM at that point, the reset will leave them little other option. Your argument works in a 30-year fixed world; but with 1/3 of recent CA mortgages option-ARMS [http://www.businessweek.com/common_ssi/map_of_misery.htm] (and not even counting other ARMS like 2/28s etc) that jingle you'll be hearing won't be Santa's reindeer.
tonigh, 6 pm, home phone rings, didn't answer it, then cell phone rings, its BofA. "We are just calling our good customers to see if you are satisfied and if there is anything else we can do for you. We notice that you have a savings account that is very low interest rate and we now have a new product with 4.3% interest rate, would you like us to convert your savings account to the new rate"?
Unbelieveable timing, must have been an urgent interoffice memo.
I think Congress has already passed a temporary bill allowing people to walk away without paying the IRS bill. This bills was supportted by Realtors as they only care about the transactions not if it is a short sale, foreclosure, etc.
There is another reason for jingle mail. A REO neighbourhood. Price declines are much larger so almost everybody will be under water and living between a crackhouse and burnout house is no fu
This graph actually says it all. I visualized the numbers off of Professor Shiller's site and it speaks volumes: Reggie Middleton's Boom Bust Blog - A quick snapshot to illustrate where real estate stands historically
Shotgun wedding? More like a howitzer wedding.
Oh well, the bigger they are, the harder they fall.
I find it hard to believe that people who can afford the mortgage are going to mail in the keys
Part of the pattern was to qualify borrowers on the teaser rate not the taser rate, 2003-2006, for all classes of loan.
Loans with built-in churn! They're like boomerangs for the brokers!
What could possible go wrong?
For some reason I enjoy watching the various 'accident' videos on youtube, but some are so horrendous in the setup that I have to look away at the critical instant.
I get that feeling with the present situation, at least out here in California.
A link to an article confirming the correlation between negative equity and default would suffice.
psychodave:
more and more research has shown with this credit cycle that the #1 predictor of loss severity is LTV status (not FICO, etc)
I assume that negative equity would be considered a "high LTV" state.
a< href="http://www.marketwatch.com/news/story/analyst-says-loan-to-value-ratios-better/story.aspx?guid=%7B8E58AD1F-2A01-49A6-8221-07B345514851%7D">Link for Dave
Excerpts:
"She added that many individuals previously considered "prime" customers who took on loans with LTV ratios of 80% and higher are performing closer to subprime loans."
[snip]
""High [loan-to-value] mortgage loans is the greatest risk pool of U.S. consumer loans, and Citigroup has the single highest exposure to it," Whitney said."
ack.
Link for Dave
"FORTUNE
BofA's awesome Countrywide tax break"
FFDIC (and other's), this very issue seems absent from the discussion (i.e., are the write downs a charge against pre-tax income and, if so, doesn't this stem the bleeding by 30-40%?)
@Yearning to Learn
Yum! Meredith Whitney! Very helpful link.
"We believe LTV analysis will prove far more predictive of not just loss frequency, but more importantly of loss severity"
To all responses:
Your generosity is exceeded only by your patience. I see now that the issue has been covered.
Let us say in the next 6 months they cut rates down substantially. Who are going to buy these houses?
The guys who got forclosed on? The jingle key crowd? The laid off bunch?
The underwater pack?
The tax break:
This is a red herring. Transactions all over the economy are often driven by shifting tax losses from an unprofitable entity to a profitable one. In this case, I doubt that BofA will be profitable this year... no profit, no taxes, no tax shifting, no tax break. Of course, the monkeys doing the economic modelling never pay attention to the profitability of their parent company. One of the implied assumptions of i-banking.
Secondly, the interest rate swaps are nothing to worry about. They are the derivatives that allow your 'standard' 30-year fixed rate mortgage to exist. Comparing them to the CDOs and credit default swaps etc is like comparing a sawhorse to a horse.