Philip Gvinter

Asset Reflation Does Not Signal Recovery for U.S.'s Collapsed Economy

I agree with all of the point made above but would like to add one important aspect of the current events which seems to have been overlooked.

One of the cornerstones of American capitalism was the separation of banking from commerce. This principle is of utmost importance in any free market economy which has a central bank and a banking cartel. This separation was broken with the Citi Corp - Travelers merger and has been further eroded with the conversion of Goldman and Morgan into bank holding companies and the mergers of BofA and Merrill. The banking cartel is now being run by investment bankers, who are really commercial entities tied loosely to the financial system. This perversion of our capitalist system and the new status of the investment bankers who by their nature are gamblers and advisors rather than bankers, as systemically important and above the rules applied to all other capitalist entities has caused an acceleration of the distortion caused by Fed interference. A Fed owned by the bankers is a necessary evil, a Fed owned by Wall St. is a quick path to utter systemic failure.

Big New Housing Problem: Mortgage Insurers Back Off

Karl,

I would agree with you when it comes to the purchase of rental properties and even 2nd homes. I have to disagree when talking about primary residences. the 4:1 leverage represented by a 20% downpayment is attractive but is just not a reasonable requirement in high cost markets. As much as I would personally like to see property prices spike down significantly which would increase their affordability I do not see a further 40% haircut as being healthy for the overall economy on a long term basis. This would be a bigger blow than the Fed could help absorb and would put not only the commercial banks but also the Federal Home Loan Bank system at serious risk with a very low likelihood of survival. Lending standards do need to be tightened a bit more but they are fairly close to sustainable at this point.

Big New Housing Problem: Mortgage Insurers Back Off

The FHA loans are 96.5LTV and the 1.5% "funding fee" is indeed upfront MI with 55bip annual premiums. To the best of my knowledge the FHA MI program is run by the FHA itself not by an outside vendor. The FHA is going to take some bad losses on the mortgages it is currently insuring.


On Jul 16 06:39 PM mortgageminister wrote:

> I can't believe no one has mentioned the 97.5% LTV FHA loan that
> requires a 1.5% up front mortgage insurance premium to HUD as well
> as MI on the back end to protect the lender. Another housing bubble
> in the making. Since the crisis FHA loans account for, don't quote
> me on this 43% or more of all purchase transactions and increasing
> on a daily basis in a DECLINING market. Almost all of the FHA loans
> made at the beginning of last year, (I'm in CA) are underwater now.
> Does this mean that FHA loans will eventually become uninsurable
> should all MI companies vanish or I guess they will make exceptions
> for FHA loans because an FHA loan is essentially a Gov loan.

Big New Housing Problem: Mortgage Insurers Back Off

Don't worry guys FHA loans are still available and are filling in the hole that MI pricing created by making it very expensive to buy a house without 20% down!

Please pardon my sarcasm but I agree with Karl and the above comments in principle but not entirely on the details. ALT-A and option ARMs are fortunately already gone and should never come be allowed to come back. Lending standards are still too lose with 50DTIs and 3.5% down payments being allowed. We need to tighten some more but not all the way back to 20% down and 36DTI. The old standard on DTI used to be 33housing 38 total debt. That is perfectly reasonable and I can even accept up to 40 total DTI regardless of the housing ratio. Really since at least a part of the mortgage payment is tax deductible it is better for the housing payment to make up a part of the DTI than for other debt. As to 20% down, that is just unrealistic. 2nd mortgages and MI have existed within reasonable limits for decades and should not be taken off the table. I think that FHA guidelines should be 5% down and reasonable access should be made for private MI with 10% down. We do want to let the housing prices correct themselves but want some level of orderliness to the process. By tightening standards from where they are today we would take out one of the remaining props to the market and let it reach true equilibrium. Tightening the standards too much will lead to even lower prices more rapidly and can bring about undesirable levels of instability. As to having to produce three years of tax returns as the only viable alternative to W2s, I think that allowing 2 years of bank statements should do just as well since tax tricks are legal and are not outright fraud. Many business owners simply find ways to write down their taxable income below its true level. The consequences of this should not include an inability to secure credit.

Populism vs. Bernanke, Round Two

I hope that you are right but the chances of systemic collapse vs. harmless nationalization seem fairly high. Also how well have our elected officials really done in representing the national interest? I mean congress is elected and are public servants right?

I truly fear that the level of corruption we are experiencing is beginning to rival the levels the USSR experienced in the 1980s. The same abandonment of principles is happening here as happened towards the end of the communist regime there.

Once the core principle of our financial system, the efficient allocation of resources to businesses and individuals looking to increase production, has been abandoned and replaced with useless paper instruments that do not invest in underlying economic activity the end becomes inevitable. We have moved away from investing in actual assets and into trading paper instruments which have no purpose but speculative gambling. Any financial product backed by swaps and sold to the general public or any swap that is not a genuine hedge should not be sold.


On Jul 10 07:22 PM dcb wrote:

> No, we nationalize and get to a real solution instead of one that
> suits wall streets interests and wastes money and time. while our
> economy goes to hell and bankers get their bonus!!

Populism vs. Bernanke, Round Two

So here's the giant elephant sitting in the "let's audit the fed" room. What happens when we find out that :

1. the fed is holding trash assets
2. the fed is a crony of the banks which own it
3. the fed is insolvent but for their ability to ignore the performance of their assets

On the one hand the truth is the truth on the other do we really want to open that Pandora's box or are we better off praying that it will not be opened until we are dead? How much of a global financial crisis would the revelation of an insolvent Fed cause?

The Latest Investment Bank Scam

Properly rated securitization is equivalent to conflict of interest free investment banking transaction. Theoretically this is possible but it has not been seen in a long time and is not likely to be seen again.

Goldman Sachs: No Global Financial Espionage Story Here

Kid,

That is what makes market manipulation hard. With enough capital one can always drive a price in one's direction, the difficult part is either hedging out the exposure as you reach your max position size or selling out of/covering the position at a profit after taking on an excessive portion of overall market volume. The trick to doing this is to create hype or find the greater fool. I firmly believe that it was the entry of the prop desks and hedge funds which drove oil from the 60s to the 90s, it was the dumb money following on their heels and buying their positions with double digit cost basis in the triple digits and the real demand holding prices there until all speculative appetite collapsed and forced prices back to the 30s. Manipulating a market is easy, profitably manipulating a market is hard. GS are good at what they do so the difficulty of creating hype and finding greater fools to unload inflated positions on is not hard.


On Jul 06 12:39 PM Kid Dynamite wrote:

> Paul, I don't know where you are getting your information (PLEASE
> tell me you're not reading Deep Capture), but this is the EXACT business
> i used to do. What you're describing is just the broker shorting
> the stock to the customer. I have no idea what you mean by "delivering
> index receipts"... if Barclays wants to buy 5x the average volume
> of an illiquid stock from me, I still need to locate it (borrow it)
> to short it to them. There is no market maker exemption here on
> the index rebalancing. And note - this HELPS the customer - as instead
> of them ripping the stock higher as they try to buy an illiquid issue,
> I have provided liquidity to them and prevented the stock from moving
> as much as it otherwise would have. The alternative is that the
> broker does NOT short the stock to the customer, and the stock just
> moves up 50% as the broker tries to buy it all at one time - is that
> preferable?
>
> Your point about the broker (GS/LEH, whoever) "driving the shares
> into the dirt" to cover positions is a massive misconception. First
> of all, the broker is SHORT the stock - he needs to buy it (or, if
> he's long it, he needs to sell it)... it does him no good to sell
> more of a stock he's already short to "push it down."... remember
> - when the broker covers the short position, he has to buy the stock
> from someone, and we already know these are illiquid stocks! So
> you can't just drive it down and then "cover it" - the act of covering
> the short will drive the stock right back up.
>
> This is what i hated about Taiibi's piece about GS manipulating the
> oil market - if GS is long oil, they can absolutely make oil go up
> by buying MORE oil... but then they need to SELL the oil! when they
> sell all this massive position that they've been using to "push the
> market around" - the price would go right back down, and they wouldn't
> make money,.
>
> In short, Paul, I have never heard of a broker holding an unreported
> unlocated market maker exempt short position in a stock for the length
> of time you're talking about in reaction to an index rebalancing
> trade.

The WSJ digs deep into data from 30 million loans and sees that - much more than subprime terms, rate resets or liar loans - low- or no-money down loans, leading to upside-down owners, are chiefly responsible for the foreclosure crisis. (See chart.) Since late 2006, most foreclosures have come on homes with prime loans.

You are 100% wrong. While FNM and FRE underwriting standards are loose by historic standards they reflect what was traditionally labeled ALT-A until the 2003-2007 credit bubble. The loans are all fully documented but allow for over high (up to the low 50s) debt-to-income ratios (DTIs) and still require private MI on any loans > 80LTV. This is sloppy but far from subprime underwriting. Also any FICO below 720 gets hit with pricing adjustments so things have improved from the days of GSEs buying Stated Income Stated Asset loans with high FICO scores and not making FICO adjustments for FICOs until 660. The asset requirements are also still too low with the typical necessary to push a deal through being 2 months PITI (principle interest taxes insurance) reserves.

At the same time where you are totally wrong is in the GSE's slice of market share. They currently control about 1/3 of the market. The FHA's share of mortgage originations went from 24% to 63% ( www.safehaven.com/arti... ) and the GSEs have about 90% of the rest with some VA and some private money loans also playing into the mix. The real vehicle for taxpayer risk taking is the FHA. 3.5% down payments, 55bip MI rates and no asset requirements plus allowing for blood relatives to be non occupant co borrowers and fairly high 45DTIs make these loans just a few notches above what used to be (before the age of stated income or in other words before the credit bubble of 2003-2007) subprime loans.

The eventual prime mortgage delinquency rate in my estimation will top out somewhere just south of 4.5% while the current batch of FHA loans may touch the low 3s with a predictable range of 3.00 to 3.25% due to the low down payment, no asset reserves and continued job loss. The GSE 125LTV refi program will not work and volume will be low. With any pricing adjustments and todays rate the program will only help those who can still afford to stay in their homes with a 10% reduction in PI mayments and likely no reduction in taxes for a total payment reduction of perhaps 8% to 9%. This is simply not going to be a major boon which allows otherwise soon to be defaulters to stay current. Some bank financing fees will turn into GSE/taxpayer losses but the scale of this will be very minor in a relative sense and as a proportion of total taxpayer losses born at the expense of propping up bank balance sheets.

We are indeed still a ways off from any meaningful bottom in the housing markets as Option ARMs are yet to adjust and the ALT-A and jumbo "prime" defaults still have a ways to climb before reaching their inevitable peaks and as job losses continue at extremely high rates. Housing will only recover with jobs and the weak accounting trick economic growth being forecast for 2010 will not bring that about .

It seems like we have learned from but are nethertheless repeating the mistakes of the 20s/30s as we have taken the opposite fiscal and monetary approach (a good thing) but abandoned the enforcement of the necessary regulations which need to be put in place for the system to heal. We have targeted only the top of the financial system and expect the aid to "trickle down" even though it is this kind of economic theory which got us here in the first place!


On Jul 04 11:07 PM Moon Kil Woong wrote:

> It is easy to figure out what is trash. Usually it's whatever Fannie
> Mae and Freddie Mac are buying. They are the mortgage sewage reprocessing
> centers for the residential real estate market. They now control
> over 90% of all new loans being written meaning, now you know the
> market is complete bunk. So much for the Fed and Treasury saying
> they were going to shrink the roles of these too institutions because
> they were a systemic risk to the system. Can you yell to them, "Liar
> liar pants on fire." on their next press conference on this topic.

The WSJ digs deep into data from 30 million loans and sees that - much more than subprime terms, rate resets or liar loans - low- or no-money down loans, leading to upside-down owners, are chiefly responsible for the foreclosure crisis. (See chart.) Since late 2006, most foreclosures have come on homes with prime loans.

You are 100% wrong. While FNM and FRE underwriting standards are loose by historic standards they reflect what was traditionally labeled ALT-A until the 2003-2007 credit bubble. The loans are all fully documented but allow for over high (up to the low 50s) debt-to-income ratios (DTIs) and still require private MI on any loans > 80LTV. This is sloppy but far from subprime underwriting. Also any FICO below 720 gets hit with pricing adjustments so things have improved from the days of GSEs buying Stated Income Stated Asset loans with high FICO scores and not making FICO adjustments for FICOs until 660. The asset requirements are also still too low with the typical necessary to push a deal through being 2 months PITI (principle interest taxes insurance) reserves.

At the same time where you are totally wrong is in the GSE's slice of market share. They currently control about 1/3 of the market. The FHA's share of mortgage originations went from 24% to 63% ( www.safehaven.com/arti... ) and the GSEs have about 90% of the rest with some VA and some private money loans also playing into the mix. The real vehicle for taxpayer risk taking is the FHA. 3.5% down payments, 55bip MI rates and no asset requirements plus allowing for blood relatives to be non occupant co borrowers and fairly high 45DTIs make these loans just a few notches above what used to be (before the age of stated income or in other words before the credit bubble of 2003-2007) subprime loans.

The eventual prime mortgage delinquency rate in my estimation will top out somewhere just south of 4.5% while the current batch of FHA loans may touch the low 3s with a predictable range of 3.00 to 3.25% due to the low down payment, no asset reserves and continued job loss. The GSE 125LTV refi program will not work and volume will be low. With any pricing adjustments and todays rate the program will only help those who can still afford to stay in their homes with a 10% reduction in PI mayments and likely no reduction in taxes for a total payment reduction of perhaps 8% to 9%. This is simply not going to be a major boon which allows otherwise soon to be defaulters to stay current. Some bank financing fees will turn into GSE/taxpayer losses but the scale of this will be very minor in a relative sense and as a proportion of total taxpayer losses born at the expense of propping up bank balance sheets.

We are indeed still a ways off from any meaningful bottom in the housing markets as Option ARMs are yet to adjust and the ALT-A and jumbo "prime" defaults still have a ways to climb before reaching their inevitable peaks and as job losses continue at extremely high rates. Housing will only recover with jobs and the weak accounting trick economic growth being forecast for 2010 will not bring that about .

It seems like we have learned from but are nethertheless repeating the mistakes of the 20s/30s as we have taken the opposite fiscal and monetary approach (a good thing) but abandoned the enforcement of the necessary regulations which need to be put in place for the system to heal. We have targeted only the top of the financial system and expect the aid to "trickle down" even though it is this kind of economic theory which got us here in the first place!


On Jul 04 11:07 PM Moon Kil Woong wrote:

> It is easy to figure out what is trash. Usually it's whatever Fannie
> Mae and Freddie Mac are buying. They are the mortgage sewage reprocessing
> centers for the residential real estate market. They now control
> over 90% of all new loans being written meaning, now you know the
> market is complete bunk. So much for the Fed and Treasury saying
> they were going to shrink the roles of these too institutions because
> they were a systemic risk to the system. Can you yell to them, "Liar
> liar pants on fire." on their next press conference on this topic.

What Were Subprime Loans Modeled On?

The biggest difference between CRA and Subprime which has not been mentioned are the underwriting standards. CRA was a subsidy placed on top of FNM/FRE loans which made them cheaper in designated areas. Subprime are loans made to non credit worthy borrowers with lax underwriting standards. The fact that both types of loans were made to similar demographics obfuscates the true intent and nature of the programs.

CRA = welfare. It was meant to subsidize those considered disadvantaged in the process of becoming home owners.

Subprime lending = high risk lending.

Subprime lending when done as a niche of the overall mortgage market was still punitive in structure for the borrowers. In the 1990s subprime loans were typically used as "credit repair" loans. They were granted to borrowers who met lower than agency but still somewhat reasonable underwriting guidelines which required the documentation of income. The loans were structured to reset in rate after 2 or 3 years at which time the timely payments made on the loan should have allowed borrowers to refinance into an agency or other prime loan. These loans were indeed very profitable because they carried high interest rates and low life expectancies with a significant amount of fee income. They were done by portfolio lenders who had a major stake in their performance.

This changed dramatically with the passage of the Financial Services Modernization Act of 1999 also know as Gram Leach Blyley which allowed the cross selling of financial products. GLB which replaced the depression era Glass-Steagle Act allowed commercial banks, insurance companies, mortgage banks and investment banks to sell the full range of financial services products. This allowed the investment bankers on Wall St. to look for opportunities in markets previously closed to them. Among those markets was the subprime mortgage market. As interest rates fell and house prices rose the default rates on subprime loans declined. This allowed for these risky loans to be packaged up and sliced up into traunches the majority of which could be rated investment grade. This created tremendous demand for the underlying loans as the packaging and re-selling of these loans was highly profitable. In order to meet this demand the traditional underwriting standards in the subprime business began to be relaxed. Higher loan to value ratios, higher debt to income ratios and worst of all the use of stated rather than documented income were the tools used to entice borrowers who would not have qualified.

This created a new set of buyers who placed tremendous demand on the housing market at a pace which could not be matched by the supply of homes further boosting house prices. Everyone seemed to be a winner as more people owned homes, the value of homes went up and everyone was making tremendous amounts of money. The elephant siting in the corner that no one wanted to acknowledge was the fact that the affordability of homes as well as the underwriting standards were reaching historic lows. No one in either political party or in the influential home building and financial services industries wanted the party to stop. It is always extremely difficult to be the wet blanket who turns off the music and ruins everyone's fun.

The need for action was fairly clear in 2003 and 2004 when house prices had reached an unsustainably low level of affordability as measured by median home price to median income ratios and underwriting standards had clearly been compromised and included products like 100% financing with seller paid closing costs and no verification of income assets or employment (no doc loans.) But everyone had too much invested in the housing market bonanza to do anything about it. By 2005-2006 there were not enough borrowers willing to take on huge mortgage payments to keep prices moving up. By 2007 the poor underwriting standards lead to massive foreclosures and the price action reversed. By 2008 the leverage which the financial system had been allowed to use in funding these loans nearly brought it to its knees as default rates quickly surpassed what had been predicted using rose colored models.

Today we are still in the middle of the process as there are still several waves of mortgage defaults coming from traditional factors like job loss to the payment resets on interest only and neg am loans scheduled to take place between 2010 and 2012.

Agency Mortgages: Pulling Back the Curtain

Karl,

The amount of trash that FNM and FRE hold is pretty astounding. I agree with you that backstopping their losses by Treasury would be impossible, however that does not seem to be the course of action decided upon by our collective brain trust.

Instead they have decided to allow the Fed, the only entity with a set of books which is not audited to backstop the losses. The Fed will buy up the worthless garbage. The garbage will underperform. The Fed will not report the full scope of the underperformance. The system will remain intact. The price for this is an aversion of deflation and the enrichment of those who perpetrated the scheme. While this is morally reprihensible it is in some ways the least painful course of action from a systemic point of view. The creditors for FNM/FRE are protected. No truly new money is created as the old money which only existed for a temporary period of time is re-created. The inflationary effect will be significant but not uncontrolable. The integrity of the system will remain nonexistent but this lack of integrity will be brought more to light....but not too much more.

I am not a huge fan of this course of action but can think of no other. If we cut off access to reasonable (low down payment but low debt ratio) credit than the housing market will plunge another 40% and the entire global financial system will infact melt down. This is not a superior solution. We do need to gradually raise lending standards but for now FNM/FRE pricing makes it such that any loan with less than 20% down goes FHA. The loans that do go the the GSEs have overly high DTIs (up to 50 rather than the more desirable 33-38 range) and do not ask for sufficient asset reserves (should be at least 12 months but is typically only 2) but are still far better than the loans which lead to the bubble. FHA underwriting standards are overly lax but these lax standards are all that stand between property prices and the abyss. The price to rent ratios and price to median income ratios need to come back in line but that cannot be done overnight. This must be a careful and gradual approach.

AIG Dumps Two Toxic Assets on the Fed

Truth be told the treasury could assume the functions of the Fed. Or the Fed could be allowed to continue to serve these functions if proper oversight was legally mandated.

I have no problem with the concept of fiat currency, a central bank and the need to control interest rates and the money supply. I do have a problem with this task, which seems best left to a fully transparent government agency being done by a privately owned corporation which lacks full transparency and any level of meaningful oversight.

I understand the benefits of keeping the Fed independent and free of political influence but still feel that the lack of transparency and oversight are highly disturbing.

AIG Dumps Two Toxic Assets on the Fed

But the banks super double secret promised that their jumbo prime portfolio with a 7% default rate and tons of stated income and stated income/stated asset loans which are now underwater are worth $.90 on the $1 how can you not believe them?!?!

I am becoming more and more disturbed by the lack of oversight and accountability at the Fed. The video of representative Darryl Issa questioning the inspector general of the Federal Reserve about $2T of loans and getting no answer is truly shocking. The Fed is an incredibly important institution but it should not be allowed to operate in a black box devoid of all transparency and public scrutiny.

According to Rolling Stone columnist Matt Taibbi, Goldman Sachs (GS) basically runs the world, or at least America (which is sort of the same thing, right?).

I agree with the disapointment in Obama's handling of the banking crisis. Where I disagree is the possibility of McCain having been any better. It was clear that this lack of action would have been the course under McCain. There was hope that Obama would be different. The appointment of Larry Summers cast a dark shadow over that hope and the reality of the administrations actions thus far has killed said hope.


On May 24 08:52 PM You're Kidding wrote:

> I am deeply saddened by what Obama is doing, or rather not doing.
>
>
> I voted for the guy; I like him. But, he is beginning to seem extraordinarily
> naive and completely hypnotized by the bankers.
>
> Knowing what I know now, and even with the good things he is trying
> to do, if I had it to do over again, I probably would vote for McCain,
> simply on the thin possibility that he might have handled the bankers
> differently.
>
> It doesn't appear anything systemic is going to change in the financial
> sector, not really.
>
> How sad for our economy and our country.