patrick.net

justme said:
SP, can you elaborate on why a mortgage issuer cannot “continue to carry them on their books” without getting a loan? Does this have to do obligations with respect to a third party, such as a margin call that needs to be fulfilled, and otherwise could not be fulfilled without selling of the holdings (which could lead to panic selling)?

I am not an expert by any means, but yes, I believe that is what it is.

Instead of panic liquidation of assets to raise cash, the issuers can make better arrangements. It also means that the liquidation can happen a little more slowly, so that things don't overshoot in the other direction.

Personally, I have mixed feelings about this direct market intervention since it robs us of an entertaining spectacle of a Gordon Gekko getting his comeuppance, but of all the things that the Fed does, this is at least a reasonable act.

SP

Thanks to all the experts for one of the most informative threads in a long time!

Another question regarding the Fed intervention. If the problem is that the banks won't lend to one another overnight and the Fed is stepping in to fix this, doesn't this imply that there are banks out there with cash, but unwilling to loan it? And if this is the case, *why* won't they make the loan? Do they fear that borrowing bank will go under and not repay?

Or is the problem that there are no banks with cash available to lend in the first place?

theotherside (TOS) is piece of shit (POS) ....

TOS is POS ...
TOS is POS ...
TOS is POS ...
.....

>> Or is the problem that there are no banks with cash available to lend in the first place?

Banks do not have same objective of FED in regards to MARKET MANIPULATION:

http://www.newyorkfed.org/markets/omo/dmm/temp.cfm

The Fed "pawn shop" is taking agency AAA MBS as collateral, but only for the weekend. Watch out for Monday the 13th!!!

Banks won't lend to one another because they're having trouble valuing their own assets. Banks aren't just borrowers but also lenders themselves. Add the MBS pollution into the mix -- which has no price because it's market is broken -- and you have credit markets seize up.

I like this analogy when people criticize the Fed:

The house is on fire. You're pretty sure the kid holding the matches standing next to you in the smoky kitchen is responsible. What do you do first? Market fundamentalists would say spank the kid and let him burn. The problem is that not only are you in the house too, but also grandma, your pregnant wife, and your new puppy. Instead, put out the fire, get everyone out... and then make sure you spank the hell out of the kid with the matches.

I think the frustration people have is we seem to never spank the kid after the fire. But letting the credit markets seize up is like letting the house burn. Maybe you'll get lucky and the fire will just stay in one room and go out on its own. Of course there's a good chance the whole thing lights up. Incidentally, this is basically the series of mistakes that caused the Great Depression to go from nasty-ass recession and market correction to global banking collapse and major political upheaval and resultant wars.

All that said, it scares me that the Fed did 3x injections today. I think Ben is a smart economist and afraid of long-run inflation, so I'm worried there's a lot more frailty to the banking system right now than they're trying to let on. My guess is that frailty has to do with international trade settlements and other big inter-country stuff. If that goes, using my analogy, the whole city is on fire.

theotherside, a woman who fancies herself too clever for the renter crowd:

1- The moment of truth is fast approaching… The probability of seeing a wave of (credit- crunch-induced) massive layoffs in the next 6-12 months has increase dramatically….

The moment has been approaching painfully slowly for as long as you've been posting here under various aliases, my dear MP.

2- I hope that everybody on this board has the required 9-12 months of living expenses stashed away in cold hard cash…

People here are far _more_ likely to have said cash than those you stuffed into $2mm Marina shitboxes with IO Option ARMs.

3- No matter where each one of us stands on the renter/owner dividing line…we should all make it like bandits in the coming recession….as long as we don’t loose our JOBS…AND THAT’S THE TRICKY PART….

How can one "stand on the renter/owner dividing line"? I only rent on odd days, the other days I own?

Anyways, it's nice to see you finally capitulate, even if you have to do it by selling more fear. How are you going to replace your real estate commissions paychecks? Just curious. I honestly hope you've lined up something else; maybe process server?

What's with housing bulls and "loose"?

PermaRenter,

I'd recommend to everyone to follow that link you posted!

There is an email subscription service that will provide
daily updates on what the NY Fed is doing.

It looks like the NY Fed gave 3-day (weekend) loans against $38B worth of MBS today!!!!

SP says:

So the Fed is specifically targeting the MBS market, and giving them an emergency drip of cash so they don’t have to sell other assets to tide over. However, this isn’t very sustainable, so it will be interesting to see what their next move is. They may cut rates, but I don’t know if that will help really - it is a crisis caused by lack of confidence, so cheap money isn’t likely to be put to the intended use.

Whether it's an emergency cash infusion into the MBS market or a rate cut, it doesn't seem like these efforts will solve the underlying problem - the lack of confidence in the value of these securities. It's becoming clear that they have been grossly overvalued, and this overvaluation has been hidden for a long time and is suddenly coming to light. Sure, a rate cut(s) may save a few holders of ARMs, but the foreclosure and housing downturn trains have already left the station, and it's going to be hard to stop them.

I don't think the Fed was targeting the Mortage market. The Fed is striving to keep the credit markets in balance, and the mortgage market is just sitting on ground zero in this fire. So any effort to maintain a balance will affect the mortgage related securities.

Their key barometer is the rate for overnight funds, which they target to 5.25%. They injected extra cash to keep that rate at or near 5.25% -- of course, it did spike to about 6% before the Fed intervened enough to push the market rate back to their target of 5.25% today.

I believe the Fed has mostly been removing liquidity during the last 12 + months in order to force the rate up to 5.25%. The natural equilibrium for the overnight rate is usually about 100 bps below the 10 year treasury. Today that would imply a natural rate of about 3.8% for the Fed Funds rate (not 5.25%). The difference has been the result of Fed market intervention to reduce liquidity, and artificially raise the overnight rate.

Press Release from The Federal Reserve Today:

Release Date: August 10, 2007

For immediate release

The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets.

The Federal Reserve will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the Federal Open Market Committee's target rate of 5-1/4 percent. In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets. As always, the discount window is available as a source of funding.

http://www.federalreserve.gov/boarddocs/press/monetary/2007/20070810/default.htm

Zephyr,

If the Fed has mostly been removing liquidity during the last 12 + months, doesn't this contradict the common characterization of the Bernanke Fed?

Bruce

That perception of Ben isn't so common. It's just common on this blog. Ben's "helicopter" statement is taken out of context. He was referring to preventing the Great Depression. He is a very learned student of that period. Ben isn't my first choice for Fed Governor, but we could have done much worse.

Hmm, it just occurred to me that I still don't quite "get" ALL of the details of the "injecting liquidity" business:

Requiem said:

The main difference this time was the focus accepting MBS as collateral, and statements about the Fed “doing it’s part”.

Question:

Does this mean that the fed normally does not loan out cash against MBS offered as security for the loan? In Permarenter's link (above), MBS is listed as the third tranche of collateral, whereas as treasury bills etc are defined as the first (and safest) tranche. Does injecting liquidity then simply mean that the fed is accepting lower grade collateral for its regular overnight/3day/short loans?

Requiem pretty much said this already, but I just want to make sure I understand it correctly. So normally, if I show up at the fed "discount window" with a pile of MBS, they will usually laugh you out of there, but this week they have pledged to take your weak collateral more seriously, and give you a loan at roughly the same interest rate as if you had shown up with 10-year T-bills or equivalent as collateral?

Justme:

The key phrase in Permarenter's link is "From time to time, for operational simplicity, the Desk has arranged RPs just in the third tranche, under which dealers have the option to pledge either mortgage-backed securities issued or fully guaranteed by federal agencies, federal agency debt, or Treasury securities. Today's RPs were of this type."

If you look at the historical operations (not just the last 25 in the link), you can see that RPs are generally made across all three tranches, with the average rate increasing for each tranche. You can also see that of the offers made, not all are accepted.

RPs in any of the tranches count as injecting liquidity. While the open market operations are a normal event, I believe the limitation of operations to the MBS tranche and especially the concurrent issuing of a reassuring press release are less usual.

Good analysis, but as usual the conclusions are severely flawed….

1- The biggest flaw: LEVERAGE

You have to compare making 7% on you down-payment while having your rent increase at the rate of inflation (2.5%-3.5%)
versus
making 0.4% real return (after factoring out all costs) on the full value of the house

2-The second biggest flaws: RISK ADJUSTED RETURN

What’s matter is not return, but risk adjusted return. Houses, like Fixed Income bonds return less because they are less risky (“2 year of nominal housing prices drop versus 18 for the stock markets in the past 45 years” per the article posted)

3- The last flaw: DIVERSIFICATION

By diversifying your portfolio (real estate, stocks, bonds) you increase dramatically your risk adjusted return (efficient frontier). (“Since 2000, houses have outpaced inflation by 6 percentage points a year. Stocks have merely matched inflation.” per the article posted)

-------------------------------------------------------------------------------

http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/WhyRentToGetRicher.aspx?page=1

Why rent? To get richer
By SmartMoney

Shares have been remarkably consistent over the past two centuries in their 7% real returns. In Jeremy Siegel's book "Stocks for the Long Run," he finds that real returns averaged 7% over nearly seven decades ending in 1870, then 6.6% through 1925 and then 6.9% through 2004.

Robert Shiller, a Yale economist and the author of "Irrational Exuberance," which predicted the stock-price collapse in 2000, has recently turned his eye to house prices. Between 1890 and 2004, he says, real house returns would've been zero if not for two brief periods: one immediately after World War II and another since about 2000. Even if we include these periods, houses returned just 0.4% a year, he says.

Between World War II and 2000, house prices beat inflation by about 2 percentage points a year. (Stocks during that time beat inflation by their usual 7 percentage points a year.) Since 2000, houses have outpaced inflation by 6 percentage points a year. (Stocks have merely matched inflation.)

Two main events have caused house valuations to inflate since World War II. First, the government subsidized housing by relaxing borrowing standards. Before the creation of the Federal Housing Authority (FHA) in 1934, homebuyers who borrowed typically put up 40% of the purchase price in cash for a five- to 15-year loan. By insuring mortgages, the FHA permitted terms of up to 20 years and down payments of just 20%. It later expanded the repayment periods to 30 years and reduced down payments to 5%. Today, down payments for FHA loans are as low as 3%.

A second event helped boost house demand in recent years. Share prices plunged in 2000. The Federal Reserve, fearing that the decline in stock wealth would cause consumers to stop spending, reduced the federal-funds rate, the core interest rate that determines the cost of everything from credit cards to mortgages, to 1% by summer 2003 from 6.5% at the start of 2001. Since most of the cost of financing a house over 30 years is interest, monthly house payments shrank and demand for houses soared. In some markets a string of big yearly increases in house prices led to panic buying.

I suspect real returns will turn negative over most of the next two decades, but that house prices won't necessarily dip. Since 1963, they've done so in only two years versus 18 for stocks.

That's because homeowners mostly just stick it out rather than sell during soft markets. But if house prices remain flat, they produce negative real returns due to the creep of inflation. According to calculations made by The Economist in summer 2005, house prices would have to stay flat for 12 years with annual inflation at 2.5% for the ratio of prices to rents to fall from its 2005 perch to merely its 1975-to-2000 average.

Bottom line: A very simple yet effective time tested strategy is….

-Take a huge chunk of your wealth to put as a down-payment of a house when you start a family as a young couple (late 20s early 30s) = > painful but necessary step to stabilize your housing costs early on

- Over the following 20-30 years, build your retirement portfolio (lots of stock indexes, no churning, dollar averaging, little bonds funds, at least 10% of pre-tax income invested in bonds, no consumer debts, pay-down mortgage)

- As an empty nester, downsize and put all the free cash into fixed income securities.

== > Golden retirement, i.e. Trust funds for grand kids, salsa classes for early retirees, 21 days cruises, round the world trips, personal chefs, anything fancy ...

The other alternative will probably lead you to bitterness and lots of 'ex ante' 'ex post' arguments.... :-)

oops...

not
"little bonds funds, at least 10% of pre-tax income invested in bonds"

but
"a small % invested in bonds funds, at least 10% of pre-tax income invested in the retirement portfolio"

Zephyr,

Thanks for a cool headed explanation during some pretty frantic times! A lot of that stuff is covered in the Series 7 Exam (it's just been a while?) as in, I never thought it would actually come in handy?

OMG,

I can't believe this! I really can't. The Global Financial System is on the verge of collapse and we're "getting advice" from POS.

YO! @ssmunch. It's @ssclowns like you that created this fricken problem! Now you want to come here and dole out sagely advice? You're kidding right? Now that every available borrowed dollar (and then some) is adjudicated to residential real estate you come around here wanting to preach about diversification? That is truly comical.

Here's the local Silly Valley spin on rising jumbo mortgage rates:

http://www.mercurynews.com/breakingnews/ci_6594654?nclick_check=1

TOS: What a huge load of crap. I don't seem to remember you posting your net worth, income and portfolio. Go ahead, hang it out there---most of us have. Are you worried that it doesn't stack up to the "lowly" renters?

To all: Really, honestly. Houses are not an "investment". Of course you should be wary of price depreciation and illiquidity, that's just common sense. Buy a house if you genuinely want to own a house---because you value the stability, you want to make physical changes to the house, or even just because it makes your wife happy. I thought the Bubblizer was cool because it forces you to put a monetary value on the intangibles. If you're not going to live somewhere for 5+ years, or if you value flexibility and mobility over perceived stability, then don't buy a house.

Randy,

On straddling the line between renting and owning: A lifelong resident of Santa Clara County, I know many people who've sorta done this for a long time, by taking in borders.

I was a border myself for several years, and I expect that I'll be taking in borders one of these days.

It may sound like a horrible situation, but once you accept it, it's just another situation, another tradeoff. I think over the arc of human history taking in a border has not been such an unusual situation and probably goes on a lot outside of the elite circle of people who read this blog.

Talbott in his book about the "Coming Crash in Real Estate" suggested that the time will come when underwater homeowners will be compelled to take in borders to service their mortgage.

astrid Says:
August 10th, 2007 at 8:48 pm
What’s with housing bulls and “loose”?
Trust me, you don't want to know. ;-)

DinOr and Brand,

Way to go in calling BS on the POS.

It can be somewhat baffling when the people (TOS) who are the root cause of the financial turmoil of today suddenly change their tune and start double-talking about how "the moment of truth is fast approaching",
as if they had nothing to do with it in the first place, all the while trying to sneak their old "buy now" mantra in the back door.

The most dangerous forms of financial "advice" comes from the class of turncoats and chameleons that always try to sail with the prevailing winds as long as possible before abandoning their course.

[Whew, how was that for a pile of loose analogies]

justme,

It's better than the pile of loose anal logs the NAR is using. :D

justme: My simple strategy on determining credibility goes like this:

1. Know who has the money.
2. Understand how they got the money.
3. Decide if that way of getting money is available to you.
4. Monitor market conditions for ones similar to how they got the money.
5. Act.

Plenty of people are rich, but many got that way by sheer luck or indirect means---born into money, married into money, bought a house right before the RE boom, purchased Microsoft shares in the 1980s, etc.

Other rich people got that way by means which are not available to me. For example, Randy appears to have major tech finance skills that led to big salaries and successful IPO companies. One of my close friends is a highly respected heart surgeon. Two more are lawyers. Those methods of wealth are not necessarily available to me because they depend on skills which I lack.

For how much everybody hates them, I think Jim Cramer and Robert Kiyosaki make some intelligent points. I don't believe that they were purely lucky (although their TV shows and books are of gratingly poor quality). Both have acumen in investing and real estate, respectively. I could potentially start my own company or massively upgrade my education in the stock market. One of my good friends started a small company and is making nice money with control of his free time.

It sounds like TOS married into money, but currently isn't producing much on her own. That's a discredited position. If TOS gave specific examples of properties she bought and sold at huge profits, then maybe she would have the right to advise people on money and real estate. Alternately, maybe her husband could give us some pointers, if he's bringing in the dough.

Yeah, I wouldn't want any of those snuck in the back door.

On a completely different topic, have you guys noticed how some mildly well known SF realtors and internet personae have been on looooong vacations recently?

theotherside

...and what about your long promised criticisms and corrections to The Bubblizer model? We factored in all that bullshit you always fall back on, and you're still dead wrong.

Could that be the reason you continue to knock over poorly constructed straw men? Or have you built me that time machine so I can go forward or back in time that I might reconcile the fact you so carelessly mix ex ante and post ante premises?

Or in more simplified words: put up or shut up. You are no longer entertaining. Your not so coyly disguised "buy now" ads are outright disgusting. While I don't believe in karma, in your case I truly hope that I am wrong.

Does anybody really think this injection of liquidity will make people buy the now worthless finacial products formerly so popular? Hahahahaha...

This is starting to get interesting. I live in Ohio and have been watching the last 3 years in disbelief. I have had a mortgage pre-approval from Wellsfargo for about 18 months. I have been renewing it every 6 months with the credit check etc. I have not been able to find a home for the price I thought was reasonable and just sat on the sidelines building a down payment.

Two weeks ago I received an email and frantic call from the loan officer saying that the product I had been approved for was no longer available. I was told that I would have to resubmit an application for a loan product that was available. The 80/20 program is now gone! My plan was to get that loan and pay the 20 off at closing. This would have saved me on the fees. I now can't find a bank in town that will give me a mortgage approval.

I wonder now if the credit has completely dried up for people like myself! National City Bank in Cleveland is no longer making mortgage loans period! I am 27 years old and rent a shack for $350 a month. I have only been able to save $12,000 for a down payment. I could get more if I used my 401k money ( Hell will freeze over before I do this.) The jobs here in Ohio just don’t pay a whole lot. The average yearly income for a family is $33k. My land lord is probably praying every night I don't move. She works 3 part time jobs.

Can anyone please share their thoughts/opinions/ life experience regarding these questions below.

What the hell is going on and how long before this mess clears up and allows me to obtain credit?

Not that is matters too much to me, my last credit check gave me a 770 Fico score. Will banks now get the fico score as well as require a 20% down payment?

The homes in my area are already overpriced in my mind. The whole "vacation" land atmosphere skews the prices up more than 100% compared to the same home just 50 miles south in the middle of a farming community. If the 20% down payment requirement returns, how long must I wait to see the home prices fall to meet the new market equilibrium?

Not that is matters too much to me, my last credit check gave me a 770 Fico score. Will banks now get the fico score as well as require a 20% down payment?

It's today's Mercury News saying that you need to have 10% down, FICO of at least 680 and the ability to document income to able to get a loan. Compare to years past, these are still pretty loose criteria.

1- Ha ha ha … I am generatig so many abusive posts, I feel like I am being gang-r@ped by a bunch of Patrick.net old-timers….

2- I went back to my last three postings trying to understand why I was getting so much love from the usual suspects…

3- I did not find any abusing language, not even my usual jokes about JBRs…I found enough spelling mistakes to make "W." look like a poet, but no abuses

4- So It must be the hard truths in the posts that are getting on the JBRs nerves…In that case, I must tell you that I truly enjoy the love that I am getting …

Bottom line:
5- I am proud to receive your love and I am also sending mine (but not in writing :-) , so as not to offend anyone) to DinOR, Brand, Randy, Astrid, PermaRenter, SFBB, SP and skibum…

6- I suspect that your bitterness and frustration have nothing to do with me but the situation summarized in the following article:

-------------------------------------------------------------------------------

NY Times

In a Spiraling Credit Crisis, Large Mortgages Grow Costly

By FLOYD NORRIS and ERIC DASH
Published: August 12, 2007

When an investment banker set out to buy a $1.5 million home on Long Island last month, his mortgage broker quoted an interest rate of 8 percent. Three days later, when the buyer said he would take the loan, the mortgage banker had bad news: the new rate was 13 percent.

“I have been in the business 20 years and I have never seen” such a big swing in interest rates, said the broker, Bob Moulton, president of the Americana Mortgage Group in Manhasset, N.Y.

“There is a lot of fear in the markets,” he added. “When there is fear, people have a tendency to overreact.”

The investment banker’s problem was that he was taking out a so-called jumbo mortgage — a loan greater than the $417,000 mortgage that can be sold to the federally chartered enterprises, Freddie Mac and Fannie Mae. The market for large mortgages has suddenly dried up.

So the FED "loaned" 36 billion, that's with a B, to the fuckwads, fuckwads "secured" the loan with Alt-A paper, what happens if fuckwads default? Doesn't this effectively mean the FED has bailed out the fuckwads?

@ Randy H:

1- I keep telling you that even though your Bubblelizer is a lot more complex than the dozen or so buy-versus-rent calculators available from the internet, it does not help the user make a better decision…

2- The real difficulty is in coming up with realistic sets of input variables for a useful sensitivity analysis…

3- To use an analogy, for the equity part of my portfolio, I only invest in low-cost index tracking funds with a dollar averaging strategy (most robust investment strategy out there). It is well known 95% of all the fancy investment strategies, expensive money mangers and financial pundits will not do better than my simple strategy over the long-term (2-3 decades). Your bubblelizer is very similar to the fancy investment strategies, expensive money mangers and financial pundits and is not that useful…

4- It is really simple…When you start a family you buy a house, that you can truly afford, with a 30year fixed mortgage and a 20% down payment, pay down the mortgage, don’t touch your equity until you downsize and only move up if you can truly afford it. If you have not yet bought, you should wait until 2009/2010 towards the end of the 2nd wave of foreclosures…

5- As long as you don’t have a truly exceptional insight into where mortgage rates, inflation, rents and housing prices will be in the next decade, your tool will surely not produce better outcome that the simple time tested common sense strategy…That’s what I mean when I talked about decision making with incomplete information and under uncertainty…

6- You want a simple strategy that produce good results under various future outcomes because that what’s matters…That’s how you can avoid making decisions and then having to invoke ‘ex ante’ and ‘ex post’ type arguments because your decisions-making process did not account for the “known unknowns”….

You want a simple strategy that produce good results under various future outcomes because that what’s matters…

Like a nice pair of fake tits and a snapping pussy?

Surfer,

>Doesn’t this effectively mean the FED has bailed out the fuckwads?

I'd like to know, too. But I have a feeling that the so-called "fed primary dealers" can ill afford to lose their particular privilege, so they had better pay the money back one way or the other. Anyone care to elaborate?

[If they don't pay, they will call Greenspan back from retirement and send him in as the leader of a black helicopter command unit. NOT!]

theotherside

Then why did you say that, by renting, you are either (a) in eminent danger of being thrown out when your FB landlord goes foreclosure; or (b) you are paying the mortgage of a smartly leveraged owner.

Does your "simply strategy" always assume that all decisions are binary, and irrespective of when & how? Or did you just accidentally try to tap into fear and jealousy?

You're too smart for your brand of bullshit. Seriously, cut the shit. You know damned well that the price paid is paramount in any financial decision, regardless of how simple or complex.

Answer me this, honestly, and I won't start cutting you out of my threads: I could buy back the Peninsula home I sold in 2005 for at least $150K *less* than I sold it for. Meanwhile, my banked equity has chugged right along returning equal or greater inflation, about 90% tax exempt. And also I've managed to increase that pot by over 15% by contributing the money I've saved by renting instead of buying an overprice piece of shit in prime-Marin (instead renting for less than 1/3 the cost of PITI).

Now, tell me how I've done my family wrong. Explain to me how securing my son's future college tuition, augmenting our retirement, and having the financial security to pursue lucrative but risky entrepreneurial ventures was a mistake? Even if I wake up tomorrow and decide I was wrong, and rush out and buy a house at today's prices, how am I behind, exactly?

Maybe we get annoyed at you calling us JBRs. It's offensive, and at this point it's unnecessarily gratuitous. Is it so hard for you to admit that maybe many of us made reasonable decisions, and perhaps now we're happy that the risky part about maybe having been wrong is past? Maybe we just don't find your shit entertaining anymore.

It was funny when it was funny, now it's just pathetic.

>> I am proud to receive your love and I am also sending mine (but not in writing , so as not to offend anyone) to DinOR, Brand, Randy, Astrid, PermaRenter, SFBB, SP and skibum…

Everybody repeat after me:

TOS is POS ...
TOS is POS ...
TOS is POS ...
TOS is POS ...
TOS is POS ...
TOS is POS ...
TOS is POS ...
TOS is POS ...