[quote=CA renter][quote=davelj]It assumes that EVENTUALLY the future losses will be much smaller than they are currently (probably a reasonable assumption, yes?). Whether that’s next year or in five years only affects the date we get our nominal dollars back, not “if” we get them back. Put another way, how the losses play out will not affect the nominal dollar loss (which will be zero), but rather the real dollar loss (which will be a positive number, no doubt, but a small fraction of the numbers we read about in the media).
I’ve addressed your spread issue before in a prior thread. I must assume that the folks running F&F have a reasonable grip on asset/liability management (their prior sins related to underwriting, as opposed to A/L management) and they are funding the long-term fixed rate portfolio with a combination of relatively long-term fixed-rate funding along with interest rate swaps (one Wall Street innovation that has been relatively helpful in aggregate). The rates on the floating portfolio will adjust as rates increase. So, I’m not implying that rising interest rates are a non-issue, but I’m not overly concerned about rising rates where the portfolio is concerned.[/quote]
Thanks for your response, Dave.
It just seems like it would be easier to manage in a stagnant/falling interest rate environment, not so easy in a rising rate environment.[/quote]
Why does it “seem” that way? (Because it’s your preference?) Please explain.
[quote=CA renter]
And, while I’m sure some safeguards have been instituted since 2008, can we assume those swaps will perform if rates become erratic and/or rise far higher and faster than people expect?[/quote]
There’s always counter-party risk. And anyone can conjure a positive or negative scenario out of just about anything.
[quote=CA renter]
One could argue that defaults will not return to historical averages if the economy ends up in a prolonged downturn, which is what I’m anticipating. IMHO, the FHA loans that have been made over the past few years will end up seeing 50%+ default rates. The GSEs will be better off, but I still think people are being optimistic in their default assumptions. I am, admittedly, an uber-bear.[/quote]
One could argue many things.
FHA serious delinquencies (90+ days delinquent) peaked at around 13% sometime back in 2009. They’re currently at 5.8%. I’ll take the under on your 50% prediction.
F&F serious delinquencies are currently at 4.5%, which is pretty bad (particularly considering how much has been charged off), but not End of Times bad.
Again, these aren’t pretty, but considering the crisis we’ve been through and the unemployment situation… I’m actually cautiously optimistic that these numbers are going to continue to very slowly improve over the next several quarters. I’m very slightly bullish on the economy for the next two years (which is a change from how I felt a year ago) and mildly bearish on housing (no change there). And, yes, we’ve got too much debt on many levels (govt. and household). But… we’ve hardly built anything at all for the last couple of years, hardly anything’s in the pipeline, so… general equilibrium will be upon us in the real estate sector within a few years. And once we start building again – even at a well-below-bubble level – employment will pick up in earnest. So, I think it’s going to be a tough few years and even when things begin to “look” better we have the secular debt issue to deal with, but… I simply don’t see the disaster you envision. I think most of it is behind us, although a mini-crisis or two wouldn’t surprise me going forward. (And the S&P at 900 wouldn’t surprise me either.)
Personally, I think it’s interesting that John Paulson’s (he of the Big Short) exposure to bank stocks is now second only to his position in gold. That’s a leveraged bet on recovery. I’m not saying he’s right; merely pointing out that he’s capable of changing his mind when the facts change.
