False Spike by Poway Seller

[farbet]

From OC renter’s blog. Check it out here folks. The bail out will really cause a mess later on.

http://bubbletracking.blogspot.com/

[bubble_contagion]

So far the only outcome from cutting the rate that homeowners have seen is inflation and higher mortgage rates. The price of oil and other imported goods will make things more expensive pushing more homeowners into foreclosure. In addition, long term interest rates go up when there is expectation of inflation so mortgage rates went up after the cut and may continue to do so if the dollar keeps loosing value. So yes, Bernake may have helped the credit crunch with the cut but home prices are now even more doomed. Some ARM resets may be lower now but 50 basis points is small compared to adjustment from teaser rate to full rate.

[ocrenter]

note: I just provided a link to poway seller’s latest article in my post. I echo the sentiment she expressed in her post.

here’s the link: http://www.californiahousingforecast.com/commentary/mortgage-rates-headed-higher-as-dollar-is-devalued.html

[davelj]

I still say all of this “activity” on the part of the Fed and Congress is just rearranging the deck chairs.

The Fed lowered rates and mortgage rates haven’t gone down. And if they lower rates again, mortgage rates probably still aren’t going to move down much. Mortgage investors now have a better understanding of the risks involved in the current environment. They are wary of most mortgage paper and the Fed can’t change really change that too much. (Until mortgage investors believe that prices have stopped falling they’re going to be gun shy, regardless of what the Fed does.)

All of this hooplah about raising the conforming mortgage limits is much ado about nothing. Even if the conforming limit gets raised, in order to participate the borrowers will still have to go full doc and cough up a 20% down payment or 10% with PMI (or something of that ilk). Does this really help things a whole lot? Maybe a little bit for some borrowers, but for the majority in trouble it doesn’t help much.

So maybe all of this activity will reduce the ultimate price declines by 5% relative to whatever they would have been otherwise, and perhaps this mess gets spread out over an additional year or two. But, ultimately, the end of the story isn’t going to change much.

Here’s the problem: The loans have already been made and nothing can be done about that. They were made to crappy borrowers at artificially inflated prices and nothing can be done about that. The goose is already cooked. Now it’s just a matter of dealing with this reality and managing the damage. But the gross amount of the damage is going to be hard to manipulate, other than to just spread out the effects a bit. I think when you dig deeper into the various Congressional proposals, etc. you’ll see that they’re not going to help many borrowers very much.

Ultimately, the market’s going to end up sorting most of this mess out, despite the Fed’s and Congress’ intentions. It’s too late. Again, the bad loans are already out there in too great a number for our central planners to change the outcome by much.

[patientrenter]

davelj,

I hope you are correct, but let me express why I am not 100% certain that your prediction (that market forces will win out) will come true.

The reason all the pols are scrambling to liberalize the rules on mortgages and mortgage securities for FNMA, Freddie Mac, FHA, OFHEO, FASB, SEC, the Fed, etc. is to keep home prices as high as possible. So if partial measures are seen not to be working as well as they’d like, they’ll move on to stronger measures.

For example, if raising the conforming limits doesn’t work because the underwriting is too tight to allow home prices to stay high, then they will loosen the underwriting criteria. Investors buying the mortgages won’t do anything to stop this because they know payments on the loans are guaranteed by taxpayers, so it makes little difference to them if FNMA/Freddie mortgages go bust or not.

If ARM resets become too painful in the free market, then short-term interest rates will be lowered, and govt-backed guarantees for re-fis will be expanded until the pressure on prices is lowered.

Most voters will be OK with a 5-10% rollback in prices as necessary medicine, but beyond that voters will push their pols to take stronger and stronger measures. Price declines beyond that could happen, but as they do they will meet ever fiercer resistance.

I am not saying a large price decline is impossible. Ultimately even the strongest counter-measures could yet be overwhelmed. It’s not an exact science, so all these measures could be overcome by market panic or sharp recession or a severe dollar collapse or something else. And the battle may become protracted, with declines dribbling in and becoming large only after many years. But it’s not all decided and inevitable.

Patient renter in OC

[davelj]

Patient renter,

I don’t think you’re completely wrong about the will of our central planners to appear as if they’re trying to “fix” this problem. As the early measures fail I’d imagine there will be others with more veracity that will arise. But…

… I think our central planners are “chasing the market down,” as it were. They’re behind the curve, so to speak, and that’s the nature of central planning. I just think these measures and the measures that follow, etc. will be too little too late to help a whole lot. That’s why I think that ultimately market forces will largely prevail.

Also, I’m not certain that, ultimately, the political will exists to “save” the troubled borrowers. After all, about 30% of the population rents, another 30% or so owns but has no mortgage, and most of the remaining 40% can pay their mortgage. The group that’s having problems, while extremely important as economic agents at the MARGIN, are not a huge voting block, and I don’t think the “rest of us” are as concerned about falling home prices as we are about meeting our mortgage payment and/or paying rent. In other words, I think that some of the central planners’ actions right now are more about the APPEARANCE of “doing something” as opposed to actually wanting to save people. But perhaps I’m just cynical that way…

Of course, I could be wrong. Wouldn’t be the first time…

[LA_Renter]

“if raising the conforming limits doesn’t work because the underwriting is too tight to allow home prices to stay high, then they will loosen the underwriting criteria. Investors buying the mortgages won’t do anything to stop this because they know payments on the loans are guaranteed by taxpayers, so it makes little difference to them if FNMA/Freddie mortgages go bust or not.”

That will simply not happen and your last sentence explains why not “FNMA/Freddie mortgages go bust”. Don’t think so. They are already under the gun. Besides once home prices begin falling such as they are now very few will be willing to take out a mortgage without the confidence that home price appreciation is certain. Loosening the underwriting criteria in a falling home market guarantees Fannie and Freddie will go bust.

[HereWeGo]

On the other hand, the weakened dollar may force the ECB to cut, Sarkozy is already barking in favor of a cut.

Either that, or the DreamLiner will just obliterate the Airbus.

[NotCranky]

Very salient posts by davel and patient followed by a great answer by LA renter.

“Besides once home prices begin falling such as they are now very few will be willing to take out a mortgage without the confidence that home price appreciation is certain.”

Just on this blog you can absolutely see the panic went up several notches in the last couple of weeks.Many people are very concerned about the ability to maintain financial security going forward. Who wants to dump a good portion what ever assets they have into a house and assume a mortgage when so many people are actually passing the “R” word and even the “D” word around and depreciation is a given. I agree with LA renter, buyers are the only ones who can muster much of a ” bail- out” and they have obviously said “hell no!”.

[BuyerWillEPB]

“Ultimately, the market’s going to end up sorting most of this mess out, despite the Fed’s and Congress’ intentions. It’s too late.”
———————–

I agree.

Read how Greenscam claims the Fed was powerless to stop the housing bubble from inflating.

“Greenspan said in an interview with Austrian magazine Format that low interest rates in the past 15 years were to blame for the house price bubble, but that central banks were powerless when they tried to bring it under control.”

So, following his same logic, the Fed will also be powerless to stop the housing crash.

[Anonymous]

You think the rate cut is for you and me? Silly rabbit! Trix are for Primary Broker-Dealers!

It is to help profitability of BANKS.

They borrow short term (from Fed funds et al) and lend long term, earning money on the spread.

Steeper yield curve == more bank profits. As it always has been, as it always will be.

This is to try to make up for the losses to come from upcoming foreclosures and derivative blowups.

“Greenspan said in an interview with Austrian magazine
Format that low interest rates in the past 15 years were to blame for the house price bubble, but that central banks were powerless when they tried to bring it under control.”

He is just plain freaking lying. And for ideological reasons.

Everybody forgets, but shouldn’t, that central banks have OTHER jobs besides interest rates. Most prominently is the regulation of their member banks in terms of “what counts as capital that they can borrow against”. Different assets (i.e. loans to public) count differently depending on their credit quality.

They should have (and some Fed governors did suggest to Greenspan years ago!) much more seriously investigated the lending standards of the banks and punished or cut them off if they wrote too many obviously foolish loans, regardless of what some model (fit to the last 2 years of melt-up markets) spits out.

Greenspan was against this traditional, prudent time-tested part of the banking business, for ideological anti-regulatory reasons.

In the old days before central banking (and hence no guarantee of solvency of deposits), the free market ‘took care of this’ by runs on the banks. And it was horrible.

And yes, Alan Greenspan could have helped deflate the stock market bubble without so many interest rake hikes which started a recession. (early enough for the 2000 election?)

Why? The Fed also has authority over margin requirements for stocks. (Why? Lessons of 1929, of course, back when people actually seemed to learn things from experience instead of accusing others of being ideologically impure).

In the biggest bubble in modern history, did they do anything about margin requirements? Did they use the single most targeted tool they have? No.

It’s obvious: bubbles ALWAYS come from imprudent use of borrowed money. In the tech bubble increasing your yearly margin rate from 7% to 7.5% per annum does nothing to stop bubble head day traders when they were looking at 10% PER DAY. Do you raise the price of a beer at 1AM to the shitfaced boozer? Hey it’s now 4.25 instead of 4 bucks. No. Bartenders have more sense than Alan Greenspan. You cut them off, period.

That’s what raising margin requirement does. When their broker cuts them off, they’re cut off.

Exactly the same thing for mortgages. It doesn’t matter if Sammy and Joe think they’ll be 30k millionaires by flipping dozens of properties in Vegas. If they’re cut off, they’re cut off.

In sum, the Fed and specifically Alan Greenspan had specific and potent weapons to use against the specific sectors which were having bubbles (while the rest of the economy was limping).

And he didn’t do ANYTHING, and lied and says that the Fed was powerless. Well, go Cheney yourself Alan. We coulda had an Arabian horse breeder running the place just as well. Or why not an airhead super model? At least the business pages would be more pleasant.

Back to the real world of real economy:

a) In the last “recovery”, median full time wages have gone NOWHERE after inflation adjustment. This is completely different from the 1990’s.

b) Chinese exports of cars increased 50% in a year. They are 3rd largest producer now, after Germany. (did they pass Japan?)

[Anonymous]

All of this hooplah about raising the conforming mortgage limits is much ado about nothing. Even if the conforming limit gets raised, in order to participate the borrowers will still have to go full doc and cough up a 20% down payment or 10% with PMI (or something of that ilk). Does this really help things a whole lot? Maybe a little bit for some borrowers, but for the majority in trouble it doesn’t help much.

It helps RICH or wannabe rich borrowers. They have full doc, they just don’t want to pay 2% more for the free market rate.

Who do you think the politicians really care about? Their friends and those in their friends’ circles.

[HereWeGo]

Looks like quite a few European politicians are calling for rate cuts. An ECB rate cut would certainly strengthen the dollar against the Euro.

[LA_Renter]

“Eurozone suffers ‘worst’ jolt since 9/11
By Ralph Atkins in Frankfurt
Published: September 21 2007 11:20 | Last updated: September 21 2007 17:27
The eurozone economy has this month suffered its biggest jolt since the aftermath of the September 2001 terrorist attacks, with global financial turmoil hitting the services sector particularly hard, according to a closely watched survey.”

http://www.ft.com/cms/s/0/d42aed9c-6826-11dc-b475-0000779fd2ac.html

They are going to have to cut IMO. I am getting a feeling that deflation is what the FED is worried about.

[HereWeGo]

That said, as of this moment, the dollar is in free fall (1.4114 Euro, 2.0289 GBP.) Also, strangely, the 91-day is in high demand, as the discount yield continues to run away from the FFR (yield is now 3.57 compared to the FFR of 4.75.)

Anyone want to take a stab at the reason for the 91-day yield flight from the FFR? Is there a historical precedent?

[ucodegen]

Anyone want to take a stab at the reason for the 91-day yield flight from the FFR? Is there a historical precedent?

Maybe discounted for anticipated devaluation of the dollar?

I don’t think many of the foreign investors will be picking up much US paper right now. Too risky. Dollar devaluation will eat into returns. The people in the US don’t save enough to handle the current deficit spending..

So onward to peso-dollars!!! I think Bernanke will learn that the US economy is no longer an island. Hopefully before it is too late. Keep the rate high, people may pick up US paper.. keep the rate low.. and what foreign country would want to pick it up? Rate of return/yield does not offset the risk..

[ucodegen]

@Dr. Chaos

“Greenspan said in an interview with Austrian magazine
Format that low interest rates in the past 15 years were to blame for the house price bubble, but that central banks were powerless when they tried to bring it under control.”

He is just plain freaking lying. And for ideological reasons.
…Most prominently is the regulation of their member banks in terms of “what counts as capital that they can borrow against”. Different assets (i.e. loans to public) count differently depending on their credit quality.

While I agree with the comments previously to this point, this I believe you are seriously wrong. You have forgotten that most of the run-up in prices was after 2003, which was when the rates started heading up. You have forgotten the issue of securitization which gets the loans off the banks books. Most of these shaky mortgages were securitized. In addition, non-banks were involved with a lot of the lending, who then sold off the loans as bundles/traunches through securitization. The banks largely held the good paper(loans) but sold off the dirty paper. The only way they would get hit is if they have to buy back the paper because they misrepresented the risk of default. In addition, the fed does not control the banks origination ‘quality’.. but the FDIC can (they insure the depositors, and therefore the risks of any lending).

The reason why most of the new shaky loans were securitized was because there is a value the Fed does control, which is the bank reserve ratio(like margin ratio). It is the ratio of value on loan to deposits/assets on hand. The banks could not loan anything more out. But if they securitize the loans, they can sell of the bundles of loans as a yielding security, and get money back from the sale, get the loans off their books to keep the bank under the reserve ratio.. and get all those origination fees etc with (supposedly) little skin in the game.

The Fed also has authority over margin requirements for stocks. (Why? Lessons of 1929, of course, back when people actually seemed to learn things from experience instead of accusing others of being ideologically impure).

In the biggest bubble in modern history, did they do anything about margin requirements? Did they use the single most targeted tool they have? No.

True.. (Margin requirements in stock accounts are similar to reserve ratios on banks).

Bartenders have more sense than Alan Greenspan. You cut them off, period.

That didn’t happen until the bars became liable if the person had an accident afterwards. Hum.. sue the Fed??

And he didn’t do ANYTHING, and lied and says that the Fed was powerless.
Wrong. First one (stock bubble), he did the wrong thing. The second one, he couldn’t because Congress allowed loans to be securitized with little oversight as to how they were securitized. This provided an end run around reserve ratios (margin requirements). I think additional authority should be given to the SEC with respect to securitized loan paper. It would be real nice to have R.E. brokers and mortgage brokers have to go through the same regulations that a ‘stock broker’ has to go through… with the same repercussions. (SECs ban on a person can be for life).

If a stock broker told a client that all he had to do if he couldn’t handle the monthly was to ‘remargin’ his existing holding because the increase in value would take care of any costs.. they would lose their license… possibly for life.

Many mortgage brokers were saying just that.

If a stock broker starts giving investment advice w/o being a licensed CFP/CFA, their goes their Series 3 or 7..

But many RE brokers were giving people financial advice, or trying to drum up some fear (buy now or forever be priced out..).

[Author]

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