Predictions
Things are moving fast in the market. Yet they seem to be very repetitive. In march subprime mortgage brokers moved down hard, and hedge funds moved in to bail them out. Cerberus bought GMAC, Farallon lent to LEND, Gerald Ford made moves on Fremont, etc. This brought a bid to the market. Now many of those transactions are unwinding. Fast Forward to June, Alt-A started becoming a question AHM blew up, Countrywide, Thornburg all blew up, and levered loans were called into question. Now they are getting a bid. Here is my prediction for 3 months from now, the long term is too hard to predict:
- HPA continues to be very negative. No financing equals no bid for any houses. As fresh tells me, the spread on jumbos over agencies is at a record. This is unsustainable. Yet it will sustain.
- The people who now own originators, servicers, and investment vehicles are going to find out that they own a liability that they will have to pay people to take off their hands. This is confirmed by my hours of conversations with the MBA who have no incentive to tell me that servicing is worthless. However they also are not liars. But here it is: When a company owns servicing, they are under the obligation to pay all required any payment that is delinquent from the borrower and to service the mortgage ongoing into default. With the crisis in scratch and dent, they have no one to offload these loans to. This means that these arrangements are a very large cash drag. No one that I know have has realized this loss on balance sheet yet. These are not assets, they are liabilities. Countrywide's equity could be wiped by MSRs alone.
- The final prediction is by far the worst. The government's insistance to bail out the borrower helps no one but in fact it gives incentive for more defaults. If you are on the cusp of default and there is an idication that you may get bailed out. It suddenly becomes much easier. Bill Gross is a dumb monkey for even suggesting this. Even the MBA who is getting bailed out believes this.
Who is really being bailed out. Study after study (read recent WSJ editorials) suggest that people who cannot afford their mortgage are better off without a mortgage as their houses normally do not appreciate. In areas where people cannot afford their mortgage houses depreciate (in my mind pure logic but apparently there was a study). So you keep borrowers in a money losing situation with crushing debt loads, and who is bailed out? Wall Street. That is the true bail out. The idiots who invested in these mortgages get their money financed by tax payers. Meanwhile more and more poeple default because they cannot afford their mortgage.
Bernanke, take the pain. Let people default to destroy and rebuild. Owning a house should not be and is not the real American Dream. Freedom is the American dream, not indentured servitude to the largest slum lord: The U.S. Government through the FHA, Fannie Mae, and Freddie Mac.
MK
posted by MattKelly54 at
5:30 PM
9 Comments:
well said. i couldn't have said it better, and probably would have taken much more words to do it anyways.
This is the easily the most exciting time to ever be involved in the markets.
We are all like young Jesse Livermores.
I am going to violate the ASAP creed and appeal to a higher authority here. George Soros has talked about feedback loops extensively. Everyone can read about it on their own but the oversimplified premise is that momentum creates its own momentum. In this case, economic events will create their own momentum and it will have unintended consequences that I could not begin to predict but am certain would be far worse than anyone expects.
Fact, sometimes things dont just work themselves out. As great as Capitalism is, it is not a moral arbitrator handing out economic justice. No one knows what the potential outcomes of this crisis could or will be. I am well aware of the issues of bailing people out. Kelly's thesis is very well stated. However, with all due respect, I think it is naive to believe that if we take the big bath now things will quickly rebound.
I for one support a government led bailout where they refi some of these mortgages. Perhaps refi fixed at 5% for 30 years. Some people will still default. Wall Street takes the loss on the early refis and the housing market stabilizes, on the margin at least.
My premise is also based on the Marie Antoinette factor. If you tell the populace to eat cake too many times you'll eventually lose your head. In this case it would come in the form of 80% marginal tax rates and a whole host of government regulation that no one wants.
PS. I enjoyed the tech crash more. There was a perverse thrill about watching 25 year old day traders and "tech" visionaries blow up.
I have a feeling that the same idiots who top ticked 2000 were trying to flip houses in 2006-7. Greater fool theory. Of course, then again a sucker was born every minute.
I don't think people are giving this housing bust the credence it deserves. The direct impact is going to be terrible for the financial markets. But it is the second and third and fourth derivative stuff that should scare you straight.
i.e. If I can't afford to pay for my mortgage, what else can't I afford to pay for? Cars? Vacations? Retail? Etc.? When will I be able to get credit again? 7 years?
Of course, my thesis is predicated on the idea that, excepting major utilities, your home loan is the LAST payment you'd miss. That could be a faulty supposition based on the way that the government is going to incentivize people to fall behind on their payments.
I also don't think that the government's solution is going to help. Bush said that he will not bail out people who bought a house that they could never afford in the first place. Isn't that everyone in the subprime fiasco? A lot of these people were qualified for mortgages based on teaser i.o. rates. Which means that if I shift their obligation into a standard 30-year 6-6.5% mortgage, they still probably can't make the payment, because it is double what they signed up for.
Even still, Matt is correct in that you're not saving home owners by bailing this situation out. Rather they are stuck with huge debt loads that will not go away in the foreseeable (30-year) future. Yes, you're saving their mortgages (direct impact, and I am not sure they'd WANT their mortgages saved if they knew the full impact), but you're saving loan originators (1st derivative), lenders (2nd derivative), and overseas investors (3rd derivative).
Someone needs to take the pain for this and it shouldn't be citizens such as myself who used restraint when purchasing a home.
Doug,
I am already being frozen out of the California market where every mortgage is a jumbo. Rates on jumbos are going for 8% or 9% now - assuming the loan will even be made. You are right, there will be pain. The question is whether the patient deserves some morphine while his left hand is being amputated.
I just don't think that the FHA saving them by converting it to a legitimate mortgage is going to have any positive effect. They are still going to own a home they can't afford. They might still default. If they don't, they are going to be house poor for a long-time coming.
Too many people have been trying to play rich for too long. This is greed of 1980's proportion.
Am I really supposed to believe that someone with a W-2 income of 75k took out a mortgage for 750k and honestly didn't KNOW what they were getting into? Bullshit. They assumed that real estate would appreciate forever, or at least until they had enough equity out of the home to supplement their income for a long, long time. Or they were too lazy to understand the obligation before the signed up for it. In any case, they deserve whatever the pied piper doles out.
Otherwise, the message that I am receiving is that I should've bought a $700k house and dk'ed my mortgage company.
I honestly do not understand why everyone believes Wallstreet needs a bailout.
I do not think you are understanding it, they are not helpinh home owners. They are already busted. They have no chips any more. They are 3 payments behind.
They are bailing out WALLSTREET.
Bailing out Wall St. Is Exactly Whats Going On.
We aren't just Wall Street. We are also bailing out nations which hold a large amount of dollar reserves and reached for yield: Germany, the UK, China, India, etc.
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