[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. 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?
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.
