Chamberlain was absolutely giddy!

[Bugs]

It’s all window dressing. As far as prices go over the long term I don’t think it matters what happens with the conventional rate. The only difference it can make is with respect to the timing, and I don’t think that difference will be significant.

The peak was built by excess demand, courtesy of the short term investors and flippers. Many of the FBs who were just buying a home for themselves were competing with these speculators.

The investors have left the building, and they took the excess demand with them. Absent this excess demand the pricing will eventually stabilize based on wage and population trends. That means we won’t be going back into growth mode until the investors decide there’s some short term profits to be made.

Housing pricing here in most neighborhoods peaked between mid-2005 and mid-2006. The beginnings of the downturn in the mid-2005 neighborhoods were already underway by mid-2006. The subprime problems didn’t really start coming to light until several months after that. The way I see it, the subprime problems, while inevitable, didn’t cause the problem, they just made it worse. Likewise, their demise didn’t start our downturn, it only makes it worse.

For the most part, a FB who couldn’t afford the conventional rate when it was 5.5% back in 2004/2005 isn’t going to be able to afford the 6.5% rate in 2007, regardless of which investors are buying it on the secondary market. Not everyone’s career is on an upward trajectory. Besides that, refinancing a 100% debt requires some equity, and equity is in decline in most areas in SD County. As far as I can tell, virtually all of the marginal loans in 2004/2005 are still going to be marginal or unfeasible in 2007. Unless these borrowers have accrued some downpayment money in the last couple years there isn’t going to be enough equity to refinance.

I think that having reasonable liquidity coupled with reasonable underwriting is a good thing for everyone. The excesses of the market will still sort themselves out over time.

I’m a lot more annoyed at the fed for printing money to throw at these lenders.

[davelj]

patientrenter,

you posted: “I don’t think the difference between the prices today of conforming and nonconforming mortgages is driven by differences in risk. It’s just an indicator of the value of the government guarantee tacked onto the mortgage security when it’s packaged and sold. If you can remove the charge for loan default risk, then of course the price of the loan goes down. This is just as true at $942K as at $417K.”

I would have completely agreed with that assessment 6 months ago and it probably still holds true to some degree today. Here’s the issue, however, as I see it going forward: the rates that the GSAs will be charging for all of these loans will be increasing regardless of how they decide to define a “conforming mortgage.” From a big picture standpoint, what I’m trying to get at is that, ultimately, somebody’s gotta pay when mortgages default, regardless of whether it’s MBS investors or taxpayers via a GSA bailout. Consequently, while it may help a little bit at the margin – because as you correctly point out, the charge for loan defaults is reduced (or perhaps “more dispersed” is a better way of putting it) – it doesn’t really address the REAL problem, which is affordability. If the difference in being able to afford a mortgage is 50 bps (lets just assume that’s the long-term “GSA advantage” for the moment), then one shouldn’t take out the loan. The real problem, at the end of the day, is prices must come down. Raising the conforming limit is a small bandage, in my opinion. But I could be wrong.

[davelj]

patientrenter,

you posted: “I don’t think the difference between the prices today of conforming and nonconforming mortgages is driven by differences in risk. It’s just an indicator of the value of the government guarantee tacked onto the mortgage security when it’s packaged and sold. If you can remove the charge for loan default risk, then of course the price of the loan goes down. This is just as true at $942K as at $417K.”

I would have completely agreed with that assessment 6 months ago and it probably still holds true to some degree today. Here’s the issue, however, as I see it going forward: the rates that the GSAs will be charging for all of these loans will be increasing regardless of how they decide to define a “conforming mortgage.” From a big picture standpoint, what I’m trying to get at is that, ultimately, somebody’s gotta pay when mortgages default, regardless of whether it’s MBS investors or taxpayers via a GSA bailout. Consequently, while it may help a little bit at the margin – because as you correctly point out, the charge for loan defaults is reduced (or perhaps “more dispersed” is a better way of putting it) – it doesn’t really address the REAL problem, which is affordability. If the difference in being able to afford a mortgage is 50 bps (lets just assume that’s the long-term “GSA advantage” for the moment), then one shouldn’t take out the loan. The real problem, at the end of the day, is prices must come down. Raising the conforming limit is a small bandage, in my opinion. But I could be wrong.

[davelj]

patientrenter,

you posted: “I don’t think the difference between the prices today of conforming and nonconforming mortgages is driven by differences in risk. It’s just an indicator of the value of the government guarantee tacked onto the mortgage security when it’s packaged and sold. If you can remove the charge for loan default risk, then of course the price of the loan goes down. This is just as true at $942K as at $417K.”

I would have completely agreed with that assessment 6 months ago and it probably still holds true to some degree today. Here’s the issue, however, as I see it going forward: the rates that the GSAs will be charging for all of these loans will be increasing regardless of how they decide to define a “conforming mortgage.” From a big picture standpoint, what I’m trying to get at is that, ultimately, somebody’s gotta pay when mortgages default, regardless of whether it’s MBS investors or taxpayers via a GSA bailout. Consequently, while it may help a little bit at the margin – because as you correctly point out, the charge for loan defaults is reduced (or perhaps “more dispersed” is a better way of putting it) – it doesn’t really address the REAL problem, which is affordability. If the difference in being able to afford a mortgage is 50 bps (lets just assume that’s the long-term “GSA advantage” for the moment), then one shouldn’t take out the loan. The real problem, at the end of the day, is prices must come down. Raising the conforming limit is a small bandage, in my opinion. But I could be wrong.

[patientrenter]

I think we are mostly in agreement, davelj. I suppose I am a little more suspicious that the 50bp GSE ‘advantage’ can be boosted by govt action in two ways, thereby making conforming loans more valuable and the conforming limit more important. My half-century on this planet has probably just made me too cynical.

What are those 2 ways? The GSAs have to charge at least the long-term default rate on the loans so they can break even. Above that, they charge for risk.

GSA rate = risk-free rate + long-term default rate + risk charge.

The government can and does manage the risk charge down, by implicitly guaranteeing GSA bonds, and by allowing them to run on very low capital. They can manage it down further by allowing them to hold even less capital, or hinting more strongly that they’ll stand behind the GSAs in a crisis.

They can manage the charge for the long-term default rate down by saying that they’ll step in in a ‘crisis’ to subsidize the GSAs. Since most default costs over several economic cycles are incurred in the darkest depths of downturns, this effective reduction in the cost to the GSAs of the defaults could be dressed up as govt just doing what it should do – stepping in when all else fails.

I’m glad you are less cynical than me!

Patient renter in OC

[patientrenter]

I think we are mostly in agreement, davelj. I suppose I am a little more suspicious that the 50bp GSE ‘advantage’ can be boosted by govt action in two ways, thereby making conforming loans more valuable and the conforming limit more important. My half-century on this planet has probably just made me too cynical.

What are those 2 ways? The GSAs have to charge at least the long-term default rate on the loans so they can break even. Above that, they charge for risk.

GSA rate = risk-free rate + long-term default rate + risk charge.

The government can and does manage the risk charge down, by implicitly guaranteeing GSA bonds, and by allowing them to run on very low capital. They can manage it down further by allowing them to hold even less capital, or hinting more strongly that they’ll stand behind the GSAs in a crisis.

They can manage the charge for the long-term default rate down by saying that they’ll step in in a ‘crisis’ to subsidize the GSAs. Since most default costs over several economic cycles are incurred in the darkest depths of downturns, this effective reduction in the cost to the GSAs of the defaults could be dressed up as govt just doing what it should do – stepping in when all else fails.

I’m glad you are less cynical than me!

Patient renter in OC

[patientrenter]

I think we are mostly in agreement, davelj. I suppose I am a little more suspicious that the 50bp GSE ‘advantage’ can be boosted by govt action in two ways, thereby making conforming loans more valuable and the conforming limit more important. My half-century on this planet has probably just made me too cynical.

What are those 2 ways? The GSAs have to charge at least the long-term default rate on the loans so they can break even. Above that, they charge for risk.

GSA rate = risk-free rate + long-term default rate + risk charge.

The government can and does manage the risk charge down, by implicitly guaranteeing GSA bonds, and by allowing them to run on very low capital. They can manage it down further by allowing them to hold even less capital, or hinting more strongly that they’ll stand behind the GSAs in a crisis.

They can manage the charge for the long-term default rate down by saying that they’ll step in in a ‘crisis’ to subsidize the GSAs. Since most default costs over several economic cycles are incurred in the darkest depths of downturns, this effective reduction in the cost to the GSAs of the defaults could be dressed up as govt just doing what it should do – stepping in when all else fails.

I’m glad you are less cynical than me!

Patient renter in OC

[Author]

Posts