[powayseller]

The borrower would pay it down when properties depreciate? Do banks reassess their properties during a market decline?

[powayseller]

The mortgage market is $8.7 trillion, and is double the size of the U.S. Treasury market. One fourth of that is due to reset in the next 2 years.

I get Rich’s answer that MBS investments are purchased by foreigners. What were they buying before 2000? Is it the Central Banks, like the BOJ mentioned in today’s Credit Markets report? Did the BOJ use their printed money to buy MBS?

There was an article in a Dallas newspaper (check the RSS link at the side bar) about a possible systemic risk to the financial system from the MBS fallout. The writer explained that a systemic risk means the entire financial system is affected, and you cannot escape its effects by diversifying.

I’m still awaiting a response from Vanguard about which bond funds don’t hold MBS, and a response from 4plexowner about how he pictures gold used as currency.

I’m pretty sure I’m going to spend the next 2 years on the sidelines, moving my money to CDs, Tbills, Berkshire Hathaway stock, and maybe 5% in various stocks and index funds. Regardless of the economy, people still need to eat. Kraft foods has a P/E of 14.

My brother, who is really smart and well read, thinks I should invest in resources, like metals, and in chinese funds. I told him that once Americans cut back on spending, the Chinese lose their largest customer, and their stocks won’t do so well.

Any comments? Anything I’ve missed?

[powayseller]

I checked w/ a mortgage broker (SoCalMtgGuy), and he added that the GSEs don’t know when someone takes out a HELOC.

[powayseller]

How do you short MBS, and how do I know I won’t get a short squeeze, since I only like the squeeze I get from my husband:)

[powayseller]

Keeping a pulse on the market is the key to knowing when to buy back in. As we have seen, the media reports lag the market by about 6 months.

Talking w/ realtors and getting access to their data (DOM, inventory) plus keeping track of changes in HAI is the way to guage the market, and know when to buy.

[powayseller]

How can you short safely, i.e. without getting a short squeeze? With all the automated computer trades, the first sign of loss causes other sell trades to execute, and then you can get stuck w/ a margin call, right? I’m just thinking this could be way over my head. I can identify the companies which will go down, but I’m not sure I can win my bets against the sophisticated traders and computers. That’s why I was thinking of which companies to go Long.

As far as REITs, I don’t know. Read the prospectus, and if you’re still unsure, e-mail the company and get their holdings in writing. Don’t REITs hold real estate in physical form, such as shopping centers, apartment buildings, commercial buildings? GSE investments are held by banks, insurance companies, banks and hedge and pension funds. They buy Fannie Mae and Freddie Mac bonds. I don’t know if REITs hold any bonds.

[powayseller]

My husband’s company lets us direct our retirement funds into a brokerage account (Vanguard), so we are not at the mercy of any fund manager or limited by the choices of a plan administrator. We are very fortunate; we can get out of GSE holdings completely. I need to review all their fund and index options, to pick the right one. Anyone who is limited in their company’s offerings, can probably do a transfer to Vanguard, and those who are reliant on a pension fund are pretty much stuck and have to hope for the best.

Mr. Brubaker – Are you saying that the mortgage loan money is coming from investors? Yes, but there are trillions of dollars involved. Where were these trillions invested before 1995? Unless new money was printed, there would be a shift from one asset class to the MBS/GSE bond market. Which asset class has suffered a loss of investor interest?

[powayseller]

Great job! My first question is: Why is the NAR and the FHFB benefitting from reporting only the LTV, and not the CLTV?

I spent an hour reading some very lengthy documents (while the kids are cooking dinner), and came up with this: The GSEs purchase the first lien in structured jumbo or piggyback loans!! Thus, by excluding the piggyback portion, they can keep lower capital requirements because they are not exposed to the total amount of the loan, just the first lien portion!! Clever, right? And the NAR would just report the first lien data, because it is also in their benefit to downplay the risks.

For further info, read on. The risk of GSEs comes from their new foray into investing. As of 2000, they had a $900 billion portfolio of mortgage loans and MBS, which exposes them to interest rate and credit risks, and operational risks. A significant percentage of their revenue comes from their investments. I bet that figure has multiplied in the 6 years since the report was written.

The “model” (I didn’t read enough to get whose model it is) allows Fannie Mae to purchase the 80% portion of an 80/10/10 loan, and no credit enhancement (i.e. PMI insurance) is requried by their charters under this structuring. This is also done for Jumbo loans. The model understates the credit risk and required capital for these structured loans. The problem is that one risky loans, by simple division, becomes two less risky loans on the books. GE’s Finance Division, which wrote this critique (obviously because the GSEs are a competitor they’d rather expose), pointed out that an 80/15 loan has the risk of a 95% LTV loan, and should be treated as a 95% LTV loan, and not an 80% LTV loan in the GSE risk profile.

The GSEs aggregate all loans > 95% LTV. However, risk increases in steps. The default risk for a 97% LTV and a 100% LTV loan ia 34% and 75% greater, respectively, than a 95% LTV loan!

The OFHEO does not consider CLTV, and underestimates the capital needed by the GSEs. For every $1 billion in an 80/10 or 80/15 combo loan, the capital should be increased by $48.9 million and $100.1 million, respectively! Just consider how much Fannie Mae can scrimp on their capital requirements by not counting the piggyback portion of their loans.

GSEs are allowed to purchase either the 1st or 2nd lien in a structured deal, so either the 80% or 20% portion of an 80/20, subjecting themselves to a 100% LTV default risk, which is, as you recall, 75% greater than the default risk on a 95% LTV.

GSEs encourage piggyback or structured loans, and it is a growing part of their business (again as of 2000). They make a Jumbo loan into a GSE-eligible mortgage.

The GSEs do classify and track liens by CLTV. But they don’t have to meet capital requirements by it, or report it.

So there you have it. Now we know why only LTV is reported. The government has not required the GSEs to update their risk profiling by CLTV.

I know why GSEs benefit from this, but why hasn’t the government required them to update their capital requirements for >80% CLTVs?

I wonder how many of you reading this are exposed to the risks at the GSEs. It’s even worse than I thought. They are holding and investing in loans based on the wrong risk profiles.

Ready to get out, yet???

[powayseller]

Where does MONEYMAKER BANK get the $500K? Remember that few banks hold their loans. They are sold on the secondary market, and there is no fractional reserve system there. Most of the money lent for mortgages came from investors, who purchased bonds and MBS and CMOs.

My question is still unanswered: from where comes the money to invest in these mortgage market at the end level, at the MBS level? What did the investors who are purchasing mortgage debt buy before there was so much mortgage debt to buy? Were they buying stocks? Were they buying bonds?

The point is that billions, if not trillions of dollars have been pumped into the housing market, and not by banks, but by the secondary mortgage market, such as Fannie, Freddie, and others. Where did that money come from?

[powayseller]

Yes, inflation is higher than reported in the CPI. The question is whether you get a higher rate of return on the TIPS than on Tbills/Tbonds. With interest rates edging up, it’s more attractive now than it was a couple years ago. I think it’s better to buy a TIPS which loses 1% annually to inflation, than to be in the money market which loses 60% because the underlying FNM bonds lost value, or to be in the stock market as it undergoes a 15% correction. That’s my general thinking. Am I missing anything?

[powayseller]

I am not concerned about the government defaulting on its debt. They’ll print more money if they need to.

People have become complacent with bonds, as times have been good for so long.

I think that anyone counting on their pension funds is in for a rude awakening. The government cannot possibly bail out every pension fund. The amount of money they would have to print would devalue the dollar.

I like the recommendation made by RightSide. TIPS (in Vanguard fund), Berkshire Hathaway (to get equity exposure), and a global index fund. I will check into these. The US stock market is trading at a very high multiple of earnings, and at some point, will need a correction too.

As far as gold, I’m still waiting for 4plexowner to finish our dialogue, and to convince me that gold is a viable store of value and trade. Until then, I’m not buying any gold. Did you know that the majority of demand of gold is by jewelers? What happens during the next recession, when people cut back on their jewelry purchases? Gold will decline, right? People are not buying gold as a store of value, but rather for speculation and jewelry.

[powayseller]

Where is a safe place to put money then? I was thinking of government Tbills or Tbonds, through a Vanguard account. I’m leery of gold, but if 4plexowner can convince me otherwise, I’m open to putting some money there.

I still haven’t heard a good argument for buying gold, and whenever I post a question regarding how we would end up paying each other in gold, the poster mysteriously disappears.

It’s obvious they’ve not thought through how realistic the “gold is the only store of value and real money” argument is.

Warren Buffet is betting against the dollar by doing currency bets of some sort. He lost last year, as the dollar didn’t drop as he expected. Perhaps we should keep some savings in euros.

The next few years are delicate. It’s not certain how long the economy will remain resilient in the face of this housing and debt bubble. I’m considering moving from index funds, money market and stay in CDs, treasury bills/bonds, perhaps euros, perhaps more Berkshire Hathaway stock. I’m looking for some feedback here.

[powayseller]

Thanks for taking the time to reply. However, I still don’t “get it”. Wages have gone up, along with prices. So we are not worse off than our ancestors. Actually, we are better off, since we have heating, a/c, running water, access to health care (even if it’s only the ER), and most people have a car and TV. These items were luxuries that not even kings and queens could have. Only a thousand years ago, people spent their days just eking out survival. So we are much better off, and we had to go off gold, because there isn’t enough of it to be used as a medium of exchange. As population increased, and we needed more gold to continue exchanging, there was no more gold available; voila: paper money.

I don’t trust the government on everything either, but buying gold doesn’t seem to improve my personal financial situation; rather, it puts it at risk.

And just because our ancestors did it, doesn’t make it better. That argument doesn’t serve to sway me.

If you have any reason to think that someday everyone will accept gold as payment, let me hear it. What would have to transpire for my landlord/grocer/electric company/IRS to accept gold as payment?

I don’t want to read Jekyll Island. I’d rather just have you tell me how you see that gold could ever become a medium of exchange.

[powayseller]

Magnetic fields are misunderstood, and seem scary to the public. This fear makes potential buyers, such as yourself, reluctant to purchase a home near a power line. When you are ready to sell, you will face this same problem. Thus, powerline proximity does depress property values.

The studies to date show no link between power lines and disease. Check out this summary.

I also wonder why you’d want to buy now. You’ve heard of the “greatest fool” phrase, right? Anyone buying now is that greater fool. I don’t mean to insult. If you have money to burn, get a sports car. You’ll still enjoy it and won’t kick yourself when prices come down.

[powayseller]

Someone gave me the argument that lots of rich people are coming here and paying cash, driving up housing prices. I checked last month w/ realtor Gordon Kane of Help-U-Sell in Poway. He told me they have about 1 or 2 cash sales per year.

I like the questions in this post. And they’ve all been answered to substantiate that this is indeed a bubble.

sdduuuuude – You make a good point. If fundamentals caused SD to be more expensive, rents would be up, too.

I first learned about the rent/buy discrepancy many years ago, in Aspen CO. A $800K condo was rented for $1500 – $2000/month. The person’s mortgage was more than double that. I asked the owner why he couldn’t just charge more rent, to cover the mortgage and property management fees. He told me that all the rents in that town were low, since that’s what the residents who work there can afford to pay.

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