Obenwan Bernanke, you are our only hope
In spite of vigorous denials from the FED regarding the weekend rumor that the FED was going to intervene DIRECTLY in the MBS market to mop up the mess, this morning blog feed is full of such analysis. A lot of legislation, basically inspired by depression-era precedents, is floating around to put a floor on the debt as housing falls. These are desperate times and the "end of free-market capitalism as we know it" according to Martin Wolf of the FT. I will reserve comment on "moral hazard" and legislation as this is full separate blog and really the topic du jour.
From RGE monitor this morning:
They are really all the same idea and can be explained as such:
Housing is still in free-fall with horrible numbers as of this morning. Banks have recognized 120B of losses with at least the same to go (we are only half way). FED monetary policy is running out of steam (I don't fully buy that: 400B liquidity injection should stabilize M2, but I am following Goldman economist analysis) so fiscal/legislative has got to take over. Guaranteeing/Buying the loans that are down the toilet essentially stops the bleeding of the banks and socializes the losses.
The Depression era agencies took 20 years to unwind the mess, and showed a small profit at the end. I do believe as many commentators point out that the MBS market is oversold and represents a rate of default that is catastrophic. But really do I know better than the market? if the market is right, we are fucked anyway and the FED/Govt needs to step in now, if the market is slightly wrong then the FED/Govt needs to step in now and will turn a profit which would just be fair. If the market is wrong by a lot, sign me up to buy some MBS. Last time I checked in a private fund to go do just that, they charged hedgies fees (which I refuse out of principle) and so far (2 month into it) are down 15%, for a supposed return of 15%, ouch!!!
From RGE monitor this morning:
- /Barr/Tyson: Saving America's Family Equity (SAFE) loan plan inspired by the successful Home Owner's Loan Corporation introduced in 1933 to deal with wave of foreclosures: Treasury and Fed would run auctions in which GSEs would buy mortgages at discount--> investors take writedown, improve their liquidity--> GSEs work with originators to restructure loans to prevent foreclosure--> only owner-occupied homes eligible, no speculators--> SAFE loans pooled and repackaged with government guarantee--> once market normalizes, SAFE ceases operation.
- FT: Dodd proposes $20bn to follow Alan Blinder, SAFE proposal for Depression-style mortgage refinancing agency (HOLC) operating with $200-400bn.
- Alan Blinder: Introduce government agency like FDR's Home Owners’ Loan Corporation (HOLC) to buy "old (or upside down) mortgages from banks -->nearly 20% of the HOLC’s borrowers defaulted anyway but HOLC closed its books in 1951 with a small profit. Likely scale of operation today: $200-400bn (see Pollock from AEI for details.)
- Baker: Upside down homeowners are actually better off if they walk away and rent instead, the only ones hurting are the banks--> The bank bailout crew wants to stop the bloodshed on Wall Street by having the government step in and either guarantee or buy up the bad mortgages.
They are really all the same idea and can be explained as such:
Housing is still in free-fall with horrible numbers as of this morning. Banks have recognized 120B of losses with at least the same to go (we are only half way). FED monetary policy is running out of steam (I don't fully buy that: 400B liquidity injection should stabilize M2, but I am following Goldman economist analysis) so fiscal/legislative has got to take over. Guaranteeing/Buying the loans that are down the toilet essentially stops the bleeding of the banks and socializes the losses.
The Depression era agencies took 20 years to unwind the mess, and showed a small profit at the end. I do believe as many commentators point out that the MBS market is oversold and represents a rate of default that is catastrophic. But really do I know better than the market? if the market is right, we are fucked anyway and the FED/Govt needs to step in now, if the market is slightly wrong then the FED/Govt needs to step in now and will turn a profit which would just be fair. If the market is wrong by a lot, sign me up to buy some MBS. Last time I checked in a private fund to go do just that, they charged hedgies fees (which I refuse out of principle) and so far (2 month into it) are down 15%, for a supposed return of 15%, ouch!!!
Comments
Bottom will be 2010-12 range varying by locale and price/income and rent/mortgage ratios. Price/income needs to get back to 3x or so. Maybe a bit higher in really high demand/low supply areas. Rent/Mortgage > 1.2 to bottom out (rare, special properties, e.g., Mint condition/modernized tastefully 1890s Victorian in good school district, excepted to some degree).
No, Silicon Valley, your 1960s drab ranches are not special! You are toast too...! Look for a 40% haircut out there...that's better than CA's Inland Empire...figure 70% down there - worse if gasoline hits $5 / gallon.
What I mean by Obenwan is the clearing of the MBS market, the govt buying the bad loans, which happened in 1930's as deetailed in the blog...
that is within their reach and within that and existing liquidity, this should be enough to backstop the problem... for good.
The Fed cannot change the psychology of people very easily. People are beginning to realize it makes no sense to buy a house and pay $5000 / month on a mortgage when you can rent it for $2000 / month. Especially when its value is going down.
We are already down as much as 40-50% off early 2006 prices in the central valley of CA and parts of FLA. 20% off good areas in San Diego. There are a lot of foreclosures coming yet regardless of what the government does. It won't matter that they fixed your crazy adjustable rate or put a floor on the MBS market if you owe $500K and your house is worth $300K. You walk, even if you can pay the mortgage. Saw this too in the late 1980s in spades.
Oh, and another bottom indicator...when the Palo Alto and Orlando crowd says RE is a terrible investment, it's time to buy :-) ...
Securitization is dead for a long long time, long live securitization.
Looks like the banks are just figuring out that, geez, these HELOCs amd 2nds up to 100% or 120% of value are REALLY exposed, like we won't get squat back on them!
Many people use these as emergency reserves or even just out of the ordinary expenses (like major car repair or house repair). Bye, bye... Banks won't lend anything above 80% LTV soon, unless it is government guaranteed. Which is going to make JUMBO loans hurt even more (even in areas with the temp increases in conforming). How many people have 20% down on a $500K house? Especially a $500K "starter" house!! And a 700+ FICO too...
I do relate to the 700k starter house. It may sound funny nowadays, but I haven't moved from the ranch we moved in when we moved from SV. I still remember the painful realization that I couldn't afford a starter house in SF. I just couldn't. Then of course I couldn't even afford the rent! that is when we moved to ATL. I do feel for the guys that feel shutout of the market and will see their public dollars bailout the guys that over-extended. There is a profound injustice in that. But hey, you know, guns, wits, horses, houses, john wayne and ronald reagan. The self sufficient cowboy dream! And some people wonder why France loved Jerry Lee Lewis. America is much funnier and true to form when it is goofy.