Tag: mortgages

The United States Of Ponzi

Nouriel Roubini pulls no punches:

Americans lived in a “Made-off” and Ponzi bubble economy for a decade or even longer. Madoff is the mirror of the American economy and of its over-leveraged agents: a house of cards of leverage over leverage by households, financial firms and corporations that has now collapsed in a heap.

When you put zero down on your home, and you thus have no equity in your home, your leverage is literally infinite and you are playing a Ponzi game.

And the bank that lent you, with zero down, a NINJA (no income, no jobs and assets) liar loan that was interest-only for a while, with negative amortization and an initial teaser rate, was also playing a Ponzi game.

Yep – it’s all that evil Wall Street banker’s fault. You twits!

BTW: there’s more Ponzi here.

Dr. Nouriel Roubini, please take a bow

And then grab a stage break

Nobody can be right all the time, but Dr. Nouriel Roubini has come pretty darn close so far. That does not, however, preclude being correct into perpetuity.

Dr. Roubini has now grasped near constant media attention, and I believe the media’s insatiable desire for content to force down the world’s throats will eventually perpetuate the production of new material that may not fit Dr. Roubini penchant for diligence. In other words, the man is in demand, and I fear it will eventually lead to some slips (if it hasn’t already):

So what can the government do? The easy part is lowering interest rates and buying toxic assets. The hard part, he says, will be tackling housing. Roubini says that the housing market, like a company restructuring in bankruptcy, needs to have “face value reduction of the debt.” Rather than go through mortgages one by one, he says reduction has to be “across the board…break every mortgage contract.”

This proposal smells faintly like an attempt at populism – and it surely would be well received by the indebted, everywhere. However, I’m not sure if Dr. Roubini thinks that by simply restructuring every mortgage on the planet borrowers will take the lesson to heart – if he does I think he is suffering from a bit of media fatigue. I’m somewhat more convinced that such a debt reduction will eventually find its way back to the balance sheets of citizens, in the form of new digital televisions and other like-kind frivolities, the desire for in the grand scheme of keeping up with the Joneses which got us into such a nasty mess in the first place. Make no mistake about it – lowering interest rates, the first-round enabler of the Jones family’s now cracked granite countertops, will guarantee it.

On a separate note, the prognostication continues at RGE Central:

Earnings per share (EPS) of S&P 500 firms will be in the $ 50 to 60 range, but they could fall to $40. The price earnings (P/E) ratio may fall in the 10 to 12 range in a U-shaped recession. If earnings are closer to 50 or the P/E ratio falls to 10 then the S&P could fall to 600 (12 x 50 or 10 x 60) or even to 500 (10 x 50). Equivalently the Dow (DJIA) would be at least as low as 7000 and possibly as low as 6000 or 5000.

See anything you can use to leverage informed decision making? I didn’t think so. The rest of us are looking at the charts, and seeing a potential bottom on the S&P of around 450. Charts are pretty much bunk as well.


There are laws of diminishing returns with respect to all analysis. My suggestion is Dr. Roubini take a breather from his, before the attention firestorm results in paralysis.

We’re talking hundreds of billions

“We’re” is an understatement, and hundreds of billions might be too…

“We’re talking hundreds of billions,” Treasury Secretary Henry Paulson said in a press conference. “This needs to be big enough to make a real difference and get to the heart of the problem.”

Paulson and Fed Chairman Ben S. Bernanke’s plans, which include the removal of illiquid mortgage securities from companies’ balance sheets, sent stocks from the U.K. to China soaring. The dollar gained, while two-year Treasury notes fell the most in 23 years, sending the yield up from the lowest level since mid-March.

“We’re” doesn’t mean the Treasury Secretary and the Chairman of the Fed personally (although some will inevitably debate whether it includes the mice in their pockets). And as Forbes notes, the price tag will almost assuredly wind up being much more than originally estimated.

Fannie’s Perilous Pursuit of Excuses (and Shills)

Daniel Mudd wanted the loans to “optimize the business“…

Internal documents show that even late in the housing bubble, Fannie Mae was drawn to risky loans by a variety of temptations, including the desire to increase its market share and fulfill government quotas for the support of low-income borrowers.

Hmm. Just a few weeks back, Paul Krugman said (emphasis mine)…

But here’s the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

You’d think a professor of economics (at Princeton University no less) might have some idea what he is talking about, particularly when allowed to regularly op-ed at the New York Times. Note that this wasn’t supposition – it was an attempt to relay facts well after the events.

Even though they’ve long been THE largest purchaser of mortgages, maybe the fact that Fannie Mae didn’t originate the pile of bad loans equates to “had nothing to do with”? I wish I knew the answer, but I’m no famed academic.

UPDATE: Oops…h/t to Paul Kedrosky on the Post story.

Aggregate Market Value of U.S. Residential Real Estate

I’ve seen this question pop up a number of times, and in each case different numbers are floated as the answer. So why not throw out another?

According to the Federal Reserve the aggregate market value of all the residential real estate in the US, as of Q1 – 2008, was (a) $19.718 trillion. In addition, there was (b) $10.601 trillion in mortgages against that real estate. Chart of growth below (click for larger view):


The estimate replacement cost of residential real estate structures at Q1-2008 was (c) $14.283 trillion. And here is a graph of the change in replacement cost of those residential structures over the period – this should provide some idea of the amount of value injected into the economy as a result of residential real estate construction (inflation notwithstanding):


Note: There are probably a few apples versus orange discrepancies as it relates to values, mortgages, and replacement costs on farm households, mobile homes, and second homes, as well as second liens taken out against properties. Also, multi-family residences were excluded where possible, as I could not ascertain what might be purely rental property.

Source: The Federal Reserve Flow of Funds Statements
(a) B.100 Balance Sheet of Households and Nonprofit Organizations – line 4
(b) L.100 Households and Nonprofit Organizations – line 25
(c) B.100 Balance Sheet of Households and Nonprofit Organizations – line 42

Mortgage VIPs

Via WSJ:

Do all Washington politicians get their loans directly from CEOs in the mortgage industry? Readers might be wondering after learning about Countrywide Financial and its VIP treatment for Senators Christopher Dodd (D., Conn.) and Kent Conrad (D., N.D.)…

Mr. Conrad then recounted how he came to receive preferential treatment from the country’s largest mortgage lender. The Senator evidently believes that his latest version of events, in which he gets a sweetheart mortgage from a CEO only after first contacting the former CEO of the largest wholesale purchaser of home mortgages, somehow makes his conduct appear more appropriate.

Pffsst. Aren’t these the same folks that are now trying to bail out the mortgage industry?

Grab those life rafts – ‘financial tsunami’ on the way?

Via Bloomberg:

Rising consumer prices will leave more U.S. consumers unable to pay their debts and may lead to a “financial tsunami,” according to Bennet Sedacca, president of money manager Atlantic Advisors LLC in Winter Park, Florida…

Sedacca wrote that current financial-market conditions remind him of “someone standing on a lonely beach, armed with only a small bucket, trying to stop a rare tsunami that hits the shores. It is how I feel about our markets and the tools being utilized by the Federal Reserve, the European Central Bank and other regulatory bodies. They are overmatched for what they are facing and, worse yet, they helped create the mess in the first place by being far too easy with money and debt creation.”

I’m tossing in the chart that Bloomberg’s site left out:


I suspect the Central Bank is going to meet a pervasive lack of cooperation with regard to quelling international demand – the situation reminds me of how “uncoordinated” world partners (i.e the U.S., Germany and Japan) became before the 1987 market correction. It seems raising rates may only serve to exacerbate the in-house financial crises – meanwhile, if Sedacca’s thesis is correct, demand for (at least) domestic goods and services is likely to falter regardless of Fed action.

When Should the Fed Crash the Party?

Peter Bernstein pits Mellon against Keynes (and Greenspan and Bernanke against the tide). The tome is shutting off the open bar to prevent the hangover.

(h/t to The Big Picture)

Editor’s Note:

Bernstein is author of two books I’ve read, The Power of Gold: The History of an Obsession and Against the Gods: The Remarkable Story of Risk. They are both quite worthy, and both certainly relevant to our “inflation ex-inflation” (quote pilfered from Barry Ritholtz) times. However, I found The Power of Gold more enlightening than the latter – Bernstein waxes poetic on the history of the metal, and concludes its worth is only in the eyes of the beholder. Against the Gods, on the other hand, won’t hit you like a Louisville Slugger unless you have some minimal exposure to elementary statistics. I’ve long since passed “Gold” on to a commodities trading friend, but Against the Gods still sits on the shelf. And if someone can develop a salient, but not necessarily completely risk-averse, argument as to why the Fed (and Congress, and the Treasury, and the rest of the Administration) should play hands off here, invariably allowing the meek to inherit (or at least take full economic advantage of) the scraps, I’ll send them my un-abused copy of Against the Gods for their reading pleasure.

Post your thesis in the comments, or put it on your blog and post a link down yonder. In addition, rationale to the contrary (why governmental bodies should step in and start paying your neighbor’s mortgage) will also be accepted, although taking that path may be fraught with risk.

Fannie Mae’s 120% Refinances

Is Fannie Mae building a new ATM?

Incentive for default…crumbling balance sheet…taxpayer bailout?

Haven’t heard that before.

Could the US deflate its way out of a financial crises?

In theory, what if…

You let those who are about to be foreclosed on be foreclosed on. Bank inventories would rise, and house prices would fall. This is called correction, and in many circles it is considered healthy. Rather than pour capital into the inevitably failing cause of bailouts, relax restrictions on the purchase of foreclosure properties. Lenders provide capital to those that qualify, instead of requiring investors to show up with a check for the full purchase price. Potential buyers sitting on the sidelines (with healthy credit ratings and plenty of savings) move in because there is now the visible possibility of a return on equity. Prices stabilize.

Meanwhile, people that probably shouldn’t have been owners in the first place – they didn’t have a down payment and/or had to fudge their income – go back to renting. Rents rise with demand, and price/rent ratios move towards historical equilibrium. Those highly credit-worthy borrowers with an understanding of the basic concept of return on capital and positive cash flow (please move over, Carlton Sheets crowd), move in further. This time they are buying to maintain, rent out, and garner a long term return on their investment – not flip to the next joker two days after they close.

Lenders are already putting the kibosh on home equity lines, so there is no need to argue this will bring the consumer-led economy to a screeching halt. Prices of everyday goods are taking care of that, and much of the non-core inflation is a direct result of interest rates and the falling dollar. Yes, demand will fall, but a significant amount that demand is consumers’ insatiable appetite for foreign goods. If the influx of good manufactured outside the US slows, you trip a decline in commodities prices – foreign demand in foreign currencies slows as a result of shrinking sales to the US, exacerbated by a stronger dollar on the back of dwindling supplies of it.

While markets aren’t keen to consider the effects of negative growth with a smile, maybe they should consider the effect of rising margins too. Falling prices means decreasing cost of goods too. Meanwhile, price conscious consumers see bargains everywhere, which negates some of the revenue declines and the unemployment associated with it.

Heck, we’re a services economy anyway, and it’s going to take plenty of accountants and attorneys and bankers to get those foreclosed homes into the right hands. And plenty of plumbers and electricians and interior designers to fix them up. Retirees make crap a few bricks while watching the Dow correct itself, but if you have 2/3rds of the savings you had before while a gallon of gas costs 1/3rd what it did while you were socking away, why would that matter? We might also see rising interest rates under this scenario, which means fixed income portfolio losses (on paper) but plenty of extra cash flow to support daily needs.

Yes, it all means some pain, especially for trading partners. I suspect the far east economies wouldn’t be particularly pleased at the thought of forced moderation to their now improving lifestyles. And first you have to buy into the idea we do truly live in a global economy – and that decoupling doesn’t exist.

Could it work?

UPDATE: Some of this might happen whether we like it or not – the Fed is finally already warning on inflation.

UPDATE 2: More on housing price/rent ratios. Note that the forecast doesn’t reflect rising rents – the spike is caused by projected housing price adjustment.