Housing Market Meltdown
The NY Times just put out the most cogent analysis of the current housing meltdown I have seen from any news outlet. The reporter, Gretchen Morgenson, asked all the right questions and got a set of very scary answers.
I think all signs point to the conclusion that we aren't anywhere near the bottom of the mortgage shakeout. The short version of the story is that the mortgage industry, bankrolled by Wall Steer, made a lot of loans to a lot of people who didn't have the capability to play. Now as their borrowers default, they stand to lose a lot of money, so much that many specualte it could trigger a recession.
The things that jumped out at me are below:
- Some banks have reported rising problems among borrowers that were deemed more creditworthy as well.
The story currently being covered by the media is focused exclusively on so-called sub-prime mortgages, those to people with a <660 size="2"> - Traders and investors who watch this world say the major participants — Wall Street firms, credit rating agencies, lenders and investors — are holding their collective breath and hoping that the spring season for home sales will reinstate what had been a go-go market for mortgage securities.
- Owners of mortgage securities that have been pooled, for example, do not have to reflect the prevailing market prices of those securities each day, as stockholders do. Only when a security is downgraded by a rating agency do investors have to mark their holdings to the market value. As a result, traders say, many investors are reporting the values of their holdings at inflated prices.
Finally, it appears that the traders in these mortgage markets, themselves don't know or have yet to disclose the actual value of their holdings. The likely truth is that losses are significantly worse than what is being reported currently. My guess is siginifcantly larger losses across a borader range of players will be announced as time passes.
I think all signs point to the conclusion that we aren't anywhere near the bottom of the mortgage shakeout. The short version of the story is that the mortgage industry, bankrolled by Wall Steer, made a lot of loans to a lot of people who didn't have the capability to play. Now as their borrowers default, they stand to lose a lot of money, so much that many specualte it could trigger a recession.
The things that jumped out at me are below:
- Some banks have reported rising problems among borrowers that were deemed more creditworthy as well.
The story currently being covered by the media is focused exclusively on so-called sub-prime mortgages, those to people with a <660 size="2"> - Traders and investors who watch this world say the major participants — Wall Street firms, credit rating agencies, lenders and investors — are holding their collective breath and hoping that the spring season for home sales will reinstate what had been a go-go market for mortgage securities.
These guys know its going to get even worse. Their only hope is a sudden up-turn in the housing market - and they need it this spring. Good luck - there isn't any data out there to justify that kind of fantastical thinking.
I thought the chart below shows just how dependent the US economy of the last few years has been on the low-interest mortgage. 6% of all economic activity hear was funded through home-equity refinance. Americans have literally borrowed against their houses to finance the growth of the last few years. The sharp (50% drop) seen over the last 2 years presages even tougher times ahead, as there is no more equity left to withdraw.
I thought the chart below shows just how dependent the US economy of the last few years has been on the low-interest mortgage. 6% of all economic activity hear was funded through home-equity refinance. Americans have literally borrowed against their houses to finance the growth of the last few years. The sharp (50% drop) seen over the last 2 years presages even tougher times ahead, as there is no more equity left to withdraw.
- Owners of mortgage securities that have been pooled, for example, do not have to reflect the prevailing market prices of those securities each day, as stockholders do. Only when a security is downgraded by a rating agency do investors have to mark their holdings to the market value. As a result, traders say, many investors are reporting the values of their holdings at inflated prices.
Finally, it appears that the traders in these mortgage markets, themselves don't know or have yet to disclose the actual value of their holdings. The likely truth is that losses are significantly worse than what is being reported currently. My guess is siginifcantly larger losses across a borader range of players will be announced as time passes.
Labels: housing
posted by rawls at 4:53 PM
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