Gary North..on the $200B Fed plan

[Hamlet]

That seem insane. Are 50% of homeowners going to default on their mortgage? Even if they do, are the homes worth nothing in a foreclosure sale?

I think the market has gone into Anal-Cranial loopback

RockOn's question of 100% or 95% seems much more reasonable.

According to a commentator in the Econbrowser post, the non-agency AAA mortgage backed securities are worth 50 to 70 % on the dollar. That's a severe haircut that we wouldn't know if the Fed is applying.

 

[nepo]

I think that there is a lot of debate on how risky these AAA assets are. I suspect that most of them are probably really secure, its just the panic in the markets has created an irrational fear that everyone is going to default on their mortgage.

Lets go back to the basics here. It's the house prices going down that broke the securitization schemes that created the real crisis that the Fed is desperately trying to fix. It rippled through the entire system. Why the prices started to go down? First, there were borrowers who wouldn't qualify otherwise who got innovative mortgage products. Then, other higher quality borrowers started to go under as they also bought too much house for their income. An oversupply causes a drop in prices. Bubbles have to burst. The whole system is now unstable.

 

[barbarus]

Not only do the subprimes reek, but the alt-As
are about to reset en mass. There's a reason these are colloquially known as "liar loans".

Unless you believe J6P and Jason-Winecooler are about to have their incomes doubled, one must speculate that they may have a bit of trouble remaining current on their debts.

 

[HFWR]

...innovative mortgage products...

Understatement of the week!

 

[ladelfina]

Are 50% of homeowners going to default on their mortgage? Even if they do, are the homes worth nothing in a foreclosure sale?

well, something [-]10%[/-] 6% of mortgages are already in delinquency or foreclosure, I believe. That could easily go to [-]20[/-] a bigger number.. then we're not even talking commercial RE loans that could be even more stinky on stalled half-built projects that no one wants at ANY price. The homes might be worth something, but how much.. and more important how long will they take to unload? Every month that goes by is $2/3/4/5k less in the bank's projected pipeline. The banks will have to take on the 6% RE commissions, too (although maybe they'll get bulk discounts! woo hoo!), and will have to start paying prop. taxes. They built and sold and mortgaged to people w/o money. People with money already are pretty stable in their homes. Who's left to buy the glut of over-priced ones? The same people who couldn't afford them in the first place?? What a mess.

The [-]scary[/-] not-at-all-scary thing is that Bernanke said 45% of current bad loans are PRIME and gov.-backed..

 

[Hamlet]

I think you're overstating the problem. People who bought too much house for their income will be in trouble. Nothing can change that. But most people have mortgages they can pay, because most people aren't foolish enough to sign up for a monthly payment that they can't make.

If you had a 30-year fixed mortgage before the crisis, nothing has changed. Even a normal ARM isn't much more expensive. Some people who would have liked to move will be stuck for a while, but they will still have the same payments they had before.

California and Florida will have it worse, because it got crazier there than most places. More of their loans were "creative". I still think fear is distorting the market more than is rational.

Lets go back to the basics here. It's the house prices going down that broke the securitization schemes that created the real crisis that the Fed is desperately trying to fix. It rippled through the entire system. Why the prices started to go down? First, there were borrowers who wouldn't qualify otherwise who got innovative mortgage products. Then, other higher quality borrowers started to go under as they also bought too much house for their income. An oversupply causes a drop in prices. Bubbles have to burst. The whole system is now unstable.

 

[al_bundy]

That seem insane. Are 50% of homeowners going to default on their mortgage? Even if they do, are the homes worth nothing in a foreclosure sale?

I think the market has gone into Anal-Cranial loopback

RockOn's question of 100% or 95% seems much more reasonable.

one of the financial blogs i read had a screenshot a few days ago of a mortgage bond that was rates AAA and had a default rate of over 20%.

the key is not how much the home is worth at auction but that in the last few years people forgot about risk and now the losses are greater than anyone dreamed. everyone thought AAA meant safe and there are a lot of AAA rated MBS's out there that are defaulting at insane rates.

unlike what the media says the real problem is Alt-A, not subprime

and most people doesn't matter since in almost every marketplace it takes a small minority of participants to move prices by a large percentage, but either way there has been a huge number if funny loans made in the last few years.

 

[al_bundy]

latest rumors are that Bear will be sold to JPM for a little more than $2 billion, half the market cap based on friday's close

 

[ladelfina]

most people have mortgages they can pay, because most people aren't foolish enough to sign up for a monthly payment that they can't make.

Hamlet, you could be right (I hope you are!!) ...but then I'd also have said "most people" wouldn't run up $10k of CC debt.

 

[Hamlet]

I believe your numbers are incorrect. Do you have a source? I've seen numbers from subprime lenders that are that bad (or worse), but everything I've seen on the overall market is nowhere near that bad.

What is the current default rate on a standard 30-year fixed mortgage? I bet that it isn't much worse than the last few years.

Note-- Your stat on 45% of the defaults being PRIME is not alarming, given that the prime market is many times the size of the subprime market. If 90% of loans have a 1% default rate, and 10% have a 10% rate, half of the defaults will come from the 90%.

well, something 10% of mortgages are already in delinquency or foreclosure, I believe. That could easily go to 20.. then we're not even talking commercial RE loans that could be even more stinky on stalled half-built projects that no one wants at ANY price. The homes might be worth something, but how much.. and more important how long will they take to unload? Every month that goes by is $2/3/4/5k less in the bank's projected pipeline. The banks will have to take on the 6% RE commissions, too (although maybe they'll get bulk discounts! woo hoo!), and will have to start paying prop. taxes. They built and sold and mortgaged to people w/o money. People with money already are pretty stable in their homes. Who's left to buy the glut of over-priced ones? The same people who couldn't afford them in the first place?? What a mess.

The scary thing is that Bernanke said 45% of current bad loans are PRIME and gov.-backed..

 

[ladelfina]

ooops! you're right. I mixed it up with the other # in my head which was 10-11% of homes being valued at less than the outstanding mortgage, and thus potential walkaways.
My mistake...

The real delinquency number is 5.82% according to these people:
Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey
They also have the breakdown of percentages there. Right again you are there, Hamlet.
Next time I promise to measure twice, rant once. Good night and sleep tight!

 

[RockOn]

I just heard on TV that Bear Sterns is going to be sold to JP for $2 a share. I hope I don't have any shares in any of my funds. They closed at $30 on Friday down from $55.
I think there is a solvency problem.

 

[nepo]

I think you're overstating the problem. People who bought too much house for their income will be in trouble. Nothing can change that. But most people have mortgages they can pay, because most people aren't foolish enough to sign up for a monthly payment that they can't make.

I thought this topic was about the Fed actions to rescue financial organizations that have got into trouble and what the implications are. To say most people don't default on their mortgages, while a true statement, is a red herring.

The crisis has to do with the securitization of bad loans, which by the magic of financial engineering became AAA rated securities. There are many bag holders and financial institutions that are going to pay the price for this. Ultimately, the risk to everyone is that the tax payers will pay the price and not the Wall Street firms that are on the verge of collapse.

A system that is based on absurd levels of leverage, no transparency, and wrong assumptions is bound to collapse. It just happened to Bear Stearns which is been sold for $2 a share of JPM stock. And the Fed is announcing just now new measures to boost liquidity to the primary dealers, companies like Bear Stearns, opening the discount window immediately at a lower rate (just 25 bps above the fed funds rate).

This is not a walk in the park.

 

[ladelfina]

Seems like there's a new "facility":
FRB: Press Release--Federal Reserve announces two initiatives designed to bolster market liquidity and promote orderly market functioning--March 16, 2008

 

[RockOn]

Seems like there's a new "facility":
FRB: Press Release--Federal Reserve announces two initiatives designed to bolster market liquidity and promote orderly market functioning--March 16, 2008

Looks to me like a 1929 move, averting the panic, unreal

 

[ladelfina]

Interesting announcing it on a Sunday. They are in a hurry.

 

[al_bundy]

I just heard on TV that Bear Sterns is going to be sold to JP for $2 a share. I hope I don't have any shares in any of my funds. They closed at $30 on Friday down from $55.
I think there is a solvency problem.

the total is around $270 million for a company that owns a building in NYC valued at $1.2 billion.

JPM wants the brokerage and clearing business as well as the clients, but i doubt this deal assumes one client will stay. and i think i read that they don't have to pay the fed back the $30 billion they borrowed. my guess is they will roll over the loan with some of bear's junk assets and call it even. and 10,000 people will probably be out of a job by the end of the week as well as the executives being out of their life savings because most of it was in company stock a la enron

 

[RockOn]

the total is around $270 million for a company that owns a building in NYC valued at $1.2 billion.

JPM wants the brokerage and clearing business as well as the clients, but i doubt this deal assumes one client will stay. and i think i read that they don't have to pay the fed back the $30 billion they borrowed. my guess is they will roll over the loan with some of bear's junk assets and call it even. and 10,000 people will probably be out of a job by the end of the week as well as the executives being out of their life savings because most of it was in company stock a la enron

What do you think, is this just the tip of the iceberg? I see the foreign markets and futures are not liking it after an early pop to the upside.

 

[Notmuchlonger]

What do you think, is this just the tip of the iceberg? I see the foreign markets and futures are not liking it after an early pop to the upside.

I think its time to pay the piper. If I was a market timer I would pull it all out and put my money into Jolly Ranchers.

 

[RockOn]

I think its time to pay the piper. If I was a market timer I would pull it all out and put my money into Jolly Ranchers.

Seriously? Not the Jolly Ranchers part, but the rest? I think not.

 

[al_bundy]

What do you think, is this just the tip of the iceberg? I see the foreign markets and futures are not liking it after an early pop to the upside.

i think so, a lot of these guys have off balance sheet assets that carry a lot of risk and alt-a is starting to crumble. what did bsc in was partly carlyle where some of their alt-a mortgage holdings that were rated AAA had delinquency rates of something like 20% - 40%

last i heard this year something like $1 trillion of mortgages will reset from teaser rates. the foreclosures for these haven't started yet

 

[Running_Man]

WIth the announcement that they will buy so-called AAA mortgages for 6 months the FED is showing they are intent on becoming the US #1 mortgage broker. Anyone that has the Fed hold their mortgage will not need to worry about that mortgage valuation for 6 months as it must be worth 100% as the goverment lent that much against it eh? How many trillions will the FED ultimately willing to take on?

The Bear Stearns problems must be enormous if JP Morgan is getting the business which was earning one billion a year recently, the real estate at Madison Ave, and a FED guarantee on 30 billion of mortgages (heh, were in neck deep in mortgages now people!) for 2 bucks a share.

This is truly an extraordinary situation. In the meantime the banks lend assets out for 3.25 percent that will earn around 5 percent if the mortgages are paid while in addition being given the cash value for them which they can invest in 6 month treasuries and earn an additional .6 percent of a point so that on the 200 billion made available if all the loans are truly good the Fed will be transferring 2-3 billion for no risk to the banks of america.

This is better than a Pell grant...

 

[Hamlet]

My point is that people are starting to lump good securities in with the bad ones. People don't trust the AAA ratings anymore, so they are just avoiding all mortgage backed securities, not just the ones backed by poor loans.

I'm trying to say that I think the majority of AAA rated MBS's are going to be fine, even though no one is able to sell them right now.

I agree that there will be no saving the companies that made massive numbers of bad loans. I wouldn't buy any of the investment banking companies, Countrywide, Citybank, or Bank of America. There are just too many bad loans on their books to be comfortable.

I would buy JPMorgan, Wells Fargo, and USBank though. It appears that they kept decent lending standards. I would also buy smaller banks that stuck to decent lending standards.

Disclosure-- I own USBank and TCF stock.

I thought this topic was about the Fed actions to rescue financial organizations that have got into trouble and what the implications are. To say most people don't default on their mortgages, while a true statement, is a red herring.

The crisis has to do with the securitization of bad loans, which by the magic of financial engineering became AAA rated securities. There are many bag holders and financial institutions that are going to pay the price for this. Ultimately, the risk to everyone is that the tax payers will pay the price and not the Wall Street firms that are on the verge of collapse.

A system that is based on absurd levels of leverage, no transparency, and wrong assumptions is bound to collapse. It just happened to Bear Stearns which is been sold for $2 a share of JPM stock. And the Fed is announcing just now new measures to boost liquidity to the primary dealers, companies like Bear Stearns, opening the discount window immediately at a lower rate (just 25 bps above the fed funds rate).

This is not a walk in the park.

 

[nepo]

I'm trying to say that I think the majority of AAA rated MBS's are going to be fine, even though no one is able to sell them right now.

Yes, the baby is getting thrown out with the bath water. However, the crisis is not about big numbers of good stuff that doesn't have a market. The crisis is about a smaller number of bad stuff bought with high leverage. When you are sinking, there's not much you can do to buy good stuff, you just try to throw away the weight (deleverage) before you hit bottom. By the time you get a margin call, it's too late.

 

[Notmuchlonger]

At least good old Warren thinks the Fed did the right thing.

Buffett praise for Fed | smh.com.au