[patientrenter]

HLS, I think bob007 was dead on when he said that home loans originated in the last few years generally offered very low extra returns to start with.

Sure, you could choose to lever up those returns – and the risk – by borrowing to buy more home loans or their derivative assets, but that’s possible with any asset. That doesn’t change the return or risk of the underlying asset. We don’t say that equities offer a 25% long-term rate of return just because buying them with lots of borrowed money would have gotten you that return over the last 50 years.

And although I think the rating agencies did a poor job of rating the securities backed by recently issued home loans, I would lay 90% of the responsibility for underestimating the risk, and driving the whole process in the direction it took, squarely on the investors. It was greedy investors looking for higher returns than offered by Treasurues that decided, of their own volition, to invest in bonds backed by home loans. They did this even though anybody, sophisticated or not, could see that the prices of the homes, and the generosity of the loans, were becoming ridiculous.

If you were selling something, and buyers made it clear they didn’t care about the quality of what you offered, wouldn’t you too eventually cur corners? It’s the buyers’ fault. They were a little dumb, but mostly greedy.

Patient renter in OC

[patientrenter]

SDR, Here’s a relevant recent post on Calculated Risk:

“US Treasury yields declined last week in a “flight to quality” but this is not a new bull market for bonds. Credit spreads (junk bonds) are getting crushed as spreads widen. Investors are trying to unload junk bonds bought over the past few years as credit spreads tightened. Hedge funds long junk bonds and short US Treasuries are forced to cover, which exaggerates the situation. This includes structures that may include those “subprime” mortgage backed securities. The best way to illustrate is to consider 10-Year Swaps and 10-Year Fannie Mae debentures. The 10-Year Swap Spread ended last week at 75.8 basis points wider than the 10-Year, 28 basis points wider year to date. The FNMA 10-Year ended last week at 65.4 basis points wider than the 10-Year, 36.3 basis points wider on the year. Given these comparisons the lower 10-Year yield is not resulting in lower mortgage rates.
DH | 07.28.07 – 10:52 pm | #

Patient renter in OC

[patientrenter]

SDR, Here’s a relevant recent post on Calculated Risk:

“US Treasury yields declined last week in a “flight to quality” but this is not a new bull market for bonds. Credit spreads (junk bonds) are getting crushed as spreads widen. Investors are trying to unload junk bonds bought over the past few years as credit spreads tightened. Hedge funds long junk bonds and short US Treasuries are forced to cover, which exaggerates the situation. This includes structures that may include those “subprime” mortgage backed securities. The best way to illustrate is to consider 10-Year Swaps and 10-Year Fannie Mae debentures. The 10-Year Swap Spread ended last week at 75.8 basis points wider than the 10-Year, 28 basis points wider year to date. The FNMA 10-Year ended last week at 65.4 basis points wider than the 10-Year, 36.3 basis points wider on the year. Given these comparisons the lower 10-Year yield is not resulting in lower mortgage rates.
DH | 07.28.07 – 10:52 pm | #

Patient renter in OC

[patientrenter]

SDR, if you read your own post starting this thread, you will indeed find yourself saying “rates are going up”, but it doesn’t really matter because we both agree that it’s more complicated than that. Some rates are going up and some are going down. We’ll see how that all plays out.

I agree with your comment that the pricing of securitized loans drives consumer loan pricing. In my job, I review investments that include a fair number of securitized loans and their derivatives, so I have a general familiarity with them and how they compare against other bonds. But my knowledge of the underlying loans is limited, because I only know them indirectly from my exposure to the securities.

I should have added another condition to my benchmark loan for Class 2, namely level fully amortizing payments at fixed interest rates.

For Extra 1, I should also have added the expected (non-panic) level of extra losses on conforming loans. This shouldn’t grow much in the near future. FNMA has a choice: Keep the extra rate charged to mortgageholders for future defaults low, based on non-panic long-term non-market asumptions, or lose the favor (and guarantee) of the govt. Only one right answer. Could go higher later if the housing market goes really bad for a few years.

Patient renter in OC

[patientrenter]

SDR, if you read your own post starting this thread, you will indeed find yourself saying “rates are going up”, but it doesn’t really matter because we both agree that it’s more complicated than that. Some rates are going up and some are going down. We’ll see how that all plays out.

I agree with your comment that the pricing of securitized loans drives consumer loan pricing. In my job, I review investments that include a fair number of securitized loans and their derivatives, so I have a general familiarity with them and how they compare against other bonds. But my knowledge of the underlying loans is limited, because I only know them indirectly from my exposure to the securities.

I should have added another condition to my benchmark loan for Class 2, namely level fully amortizing payments at fixed interest rates.

For Extra 1, I should also have added the expected (non-panic) level of extra losses on conforming loans. This shouldn’t grow much in the near future. FNMA has a choice: Keep the extra rate charged to mortgageholders for future defaults low, based on non-panic long-term non-market asumptions, or lose the favor (and guarantee) of the govt. Only one right answer. Could go higher later if the housing market goes really bad for a few years.

Patient renter in OC

[patientrenter]

Here, here, kewp. When I see things like this, it steels me to squeeze every last painful drop of value from the seller when I do eventually buy. Those are my tax dollars they agitated to spend with the sole purpsoe of moving value from me to them! No mercy! [And no more exclamation points!]

Patient renter in OC

[patientrenter]

Here, here, kewp. When I see things like this, it steels me to squeeze every last painful drop of value from the seller when I do eventually buy. Those are my tax dollars they agitated to spend with the sole purpsoe of moving value from me to them! No mercy! [And no more exclamation points!]

Patient renter in OC

[patientrenter]

SDR, you say that “rates are going up”, but as you point out elsewhere in your post, they are going up only for lower-grade mortgages. (Agreed, most mortgages written in 2006 and 2005 and 2004 were in this category, but there are other kinds of low-risk mortgages still available.)

Here’s my take on rates for mortgages. It’s based solely on looking at the investment side. I’ve never borrowed money, so I don’t have a clue what a real actual mortgage looks like.

Class 1: Mortgages that get sold to GNMA, FNMA.. Rate = Treasury + Extra 1

Class 2: Mortgages that are conservatively underwritten but are not sold to the agencies. Rate = Treasury + Extra 2

Class 3: Mortgages that are aggressively underwritten. Rate = Treasury + Extra 3.

Extra 1 won’t change much, because of the explicit or implicit full faith and credit guarantee against default provided by the taxpayers, thanks to Congress.

Extra 2 will increase by a decent but not ridiculous amount. (I don’t know, I’d need to think hard, but maybe 20bp for a 20% down, 30% DTI, fully doc’d loan, increasing to 50-100bp for weakening of any one of these conditions.)

Extra 3 will increase by hundreds of basis points. Some forms of these loans will go extinct because the price is so high it’s unattractive to even the most irresponsible buyers, but others will continue to be available, at the higher price.

Patient renter in OC

[patientrenter]

SDR, you say that “rates are going up”, but as you point out elsewhere in your post, they are going up only for lower-grade mortgages. (Agreed, most mortgages written in 2006 and 2005 and 2004 were in this category, but there are other kinds of low-risk mortgages still available.)

Here’s my take on rates for mortgages. It’s based solely on looking at the investment side. I’ve never borrowed money, so I don’t have a clue what a real actual mortgage looks like.

Class 1: Mortgages that get sold to GNMA, FNMA.. Rate = Treasury + Extra 1

Class 2: Mortgages that are conservatively underwritten but are not sold to the agencies. Rate = Treasury + Extra 2

Class 3: Mortgages that are aggressively underwritten. Rate = Treasury + Extra 3.

Extra 1 won’t change much, because of the explicit or implicit full faith and credit guarantee against default provided by the taxpayers, thanks to Congress.

Extra 2 will increase by a decent but not ridiculous amount. (I don’t know, I’d need to think hard, but maybe 20bp for a 20% down, 30% DTI, fully doc’d loan, increasing to 50-100bp for weakening of any one of these conditions.)

Extra 3 will increase by hundreds of basis points. Some forms of these loans will go extinct because the price is so high it’s unattractive to even the most irresponsible buyers, but others will continue to be available, at the higher price.

Patient renter in OC

[patientrenter]

Cyphire, I too am looking to ensure a source of future revenue.

During the last 1 1/2 years, I’ve used money market and short bond funds (mostly munis) to build a diversified portfolio of about 40 foreign and domestic dividend-paying stocks across a variety of industries. My average dividend yield is about 4%. I don’t know if the dividend income will tank with a recession, or lag inflation over the long haul, but I felt it was more likely to keep up with inflation or incomes over the very long haul than investing in munis.

I don’t see a lot of good buys right now. Since January, I’ve been planning to use JPY/USD futures to buy yen. It seems the yen is a good long-term store of value, so I’m prepared to spend some carry cost money to diversify into it. If the dollar tanks because of inflation, I’ll be hedged by my yen holdings. If the dollar holds up, then my stocks are probably doing well to offset the yen carry costs.

If I were in your shoes, I wouldn’t be excited about buying a lot of stocks or other assets at today’s very high prices. But I’d buy a few. And I’d buy a bunch of undervalued currencies (measured by PPP and a few other measures) until I saw a better buying opportunity elsewhere in the future.

Patient renter in OC

[patientrenter]

Cyphire, I too am looking to ensure a source of future revenue.

During the last 1 1/2 years, I’ve used money market and short bond funds (mostly munis) to build a diversified portfolio of about 40 foreign and domestic dividend-paying stocks across a variety of industries. My average dividend yield is about 4%. I don’t know if the dividend income will tank with a recession, or lag inflation over the long haul, but I felt it was more likely to keep up with inflation or incomes over the very long haul than investing in munis.

I don’t see a lot of good buys right now. Since January, I’ve been planning to use JPY/USD futures to buy yen. It seems the yen is a good long-term store of value, so I’m prepared to spend some carry cost money to diversify into it. If the dollar tanks because of inflation, I’ll be hedged by my yen holdings. If the dollar holds up, then my stocks are probably doing well to offset the yen carry costs.

If I were in your shoes, I wouldn’t be excited about buying a lot of stocks or other assets at today’s very high prices. But I’d buy a few. And I’d buy a bunch of undervalued currencies (measured by PPP and a few other measures) until I saw a better buying opportunity elsewhere in the future.

Patient renter in OC

[patientrenter]

Gary, that last chart of the prices of the 2/2 units is… stunning. I know we’ve all seen data showing prices rising, and we – the old ones like me anyway – remember prices back in 1997 and 1989 and so on, but the memory gets a bit fuzzy at times.

This chart is one of crispest and most irrefutable encapsulations I’ve seen of what happened, and what’s happening now, to prices. It’s amazing how little data is needed to get good information if it’s this well-chosen. Thanks.

Patient renter in OC

[patientrenter]

Gary, that last chart of the prices of the 2/2 units is… stunning. I know we’ve all seen data showing prices rising, and we – the old ones like me anyway – remember prices back in 1997 and 1989 and so on, but the memory gets a bit fuzzy at times.

This chart is one of crispest and most irrefutable encapsulations I’ve seen of what happened, and what’s happening now, to prices. It’s amazing how little data is needed to get good information if it’s this well-chosen. Thanks.

Patient renter in OC

[patientrenter]

kewp, either the owners of the REOs are dumb or slow or they’re lobbying frantically for a future bail-out. I’d split the probabilities about evenly.

Patient renter in OC

[patientrenter]

kewp, either the owners of the REOs are dumb or slow or they’re lobbying frantically for a future bail-out. I’d split the probabilities about evenly.

Patient renter in OC

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