[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]

simonbart, Is the world coming apart? Is the great depression going to repeat?

There’s a chance of that. But think about the big picture first. I think there are 5 billion people on this planet who want to do better. At least 3 billion of them are hell-bent on doing better real soon. Are they going to let some financial problem in one (big) asset type in California and Florida destroy their dreams for the next 10 years?

Honestly, what do you think?

Not everyone on this planet is 500% invested in an overpriced California stucco box.

Patient renter in OC

[patientrenter]

simonbart, Is the world coming apart? Is the great depression going to repeat?

There’s a chance of that. But think about the big picture first. I think there are 5 billion people on this planet who want to do better. At least 3 billion of them are hell-bent on doing better real soon. Are they going to let some financial problem in one (big) asset type in California and Florida destroy their dreams for the next 10 years?

Honestly, what do you think?

Not everyone on this planet is 500% invested in an overpriced California stucco box.

Patient renter in OC

[patientrenter]

simonbart, Is the world coming apart? Is the great depression going to repeat?

There’s a chance of that. But think about the big picture first. I think there are 5 billion people on this planet who want to do better. At least 3 billion of them are hell-bent on doing better real soon. Are they going to let some financial problem in one (big) asset type in California and Florida destroy their dreams for the next 10 years?

Honestly, what do you think?

Not everyone on this planet is 500% invested in an overpriced California stucco box.

Patient renter in OC

[patientrenter]

I agree, Ex-SD. The writer squarely fingers the 3 primary partners in the crime:

1. Home buyers

2. Mortgage bond investors

3. Middlemen between 1 and 2

The “crime” of this mortgage melt-down could not have been committed without the cooperation of all 3 parties, and most of that cooperation was as knowing and informed as it needed to be to make them fully culpable. [Warning: full rant in progress…]

Even “dumb” home buyers made a very conscious choice to give up renting and buy instead. And that was only partly so they could paint their home purple. You’d never pay your landlord $200,000 for the privilege of painting your rental apartment purple. So you don’t take on the risk of losing $200,000 of your own money to buy a home just so you can paint it purple. Buyers all along were hoping for big windfall gains. And they all along knew they could mail back the keys if it didn’t turn out that way. No one taught them about options, but they smelled that they were being given an incredibly cheap call option.

Patient renter in OC

[patientrenter]

I agree, Ex-SD. The writer squarely fingers the 3 primary partners in the crime:

1. Home buyers

2. Mortgage bond investors

3. Middlemen between 1 and 2

The “crime” of this mortgage melt-down could not have been committed without the cooperation of all 3 parties, and most of that cooperation was as knowing and informed as it needed to be to make them fully culpable. [Warning: full rant in progress…]

Even “dumb” home buyers made a very conscious choice to give up renting and buy instead. And that was only partly so they could paint their home purple. You’d never pay your landlord $200,000 for the privilege of painting your rental apartment purple. So you don’t take on the risk of losing $200,000 of your own money to buy a home just so you can paint it purple. Buyers all along were hoping for big windfall gains. And they all along knew they could mail back the keys if it didn’t turn out that way. No one taught them about options, but they smelled that they were being given an incredibly cheap call option.

Patient renter in OC

[patientrenter]

I agree, Ex-SD. The writer squarely fingers the 3 primary partners in the crime:

1. Home buyers

2. Mortgage bond investors

3. Middlemen between 1 and 2

The “crime” of this mortgage melt-down could not have been committed without the cooperation of all 3 parties, and most of that cooperation was as knowing and informed as it needed to be to make them fully culpable. [Warning: full rant in progress…]

Even “dumb” home buyers made a very conscious choice to give up renting and buy instead. And that was only partly so they could paint their home purple. You’d never pay your landlord $200,000 for the privilege of painting your rental apartment purple. So you don’t take on the risk of losing $200,000 of your own money to buy a home just so you can paint it purple. Buyers all along were hoping for big windfall gains. And they all along knew they could mail back the keys if it didn’t turn out that way. No one taught them about options, but they smelled that they were being given an incredibly cheap call option.

Patient renter in OC

[patientrenter]

Is this a lot of words just to say that the writer’s opinion is that inflation will be high enough in the (near) future to save nominal home prices from decreases?

Might be true… might not be… Your guess is as good as his.

Patient renter in OC

[patientrenter]

Is this a lot of words just to say that the writer’s opinion is that inflation will be high enough in the (near) future to save nominal home prices from decreases?

Might be true… might not be… Your guess is as good as his.

Patient renter in OC

[patientrenter]

Is this a lot of words just to say that the writer’s opinion is that inflation will be high enough in the (near) future to save nominal home prices from decreases?

Might be true… might not be… Your guess is as good as his.

Patient renter in OC

[patientrenter]

davelj, 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.

Patient renter in OC

[patientrenter]

davelj, 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.

Patient renter in OC

[patientrenter]

davelj, 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.

Patient renter in OC

[patientrenter]

No, SD R. I’m mercifully out of range up here in OC. But why wouldn’t the limits be raised? It’s a democracy, and if a lot of voters want it enough, it will happen. Let’s see, the big gains are obvious and immediate and affect lots of voters, and the big losses come later and are diffuse and affect fewer voters. Hmm…. Hard to predict what Congress would want to do with that choice.

Patient renter in OC

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