patrick.net

Is anyone else watching Greenspan on 60 Minutes?

If the Fed cuts big and then housing rallies in response, it's just more air into the balloon. But the bigger it gets, the louder it's going to pop.

I'm curious what people think about the various offshore institutions offering higher CD rates (in the 8+% range for $100000 and a 5 year commitment). The links keep popping up on the blog:

http://www.mlnbank.com/EN/Services/premCDs.htm

8% isn't much if inflation goes haywire, but what about getting a Euro-denominated CD and parking your cash for 3 years at 7.75%?

I'm not so sure I believe he'll cut and if he does, it'll probably be 25 bp's. I just think 50 bp's will send too strong of a message that our fake economy isn't as strong as they make it out to be. Even if they cut; I don't see it making much of a difference as far as saving FB's. Lenders do not want to lend to them. There is way too much inventory to absorb; prices will just trend down more as knife-catchers who think they are bargain hunters will lower all the comps in the area; pushing distressed FB's deeper into the red and causing more jingle mail.

As for the greenback; it's below the support level of 80 (this is scary!) and foreigners are starting to lose their confidence. This is another reason I am not so sure I believe he will cut the rates. If the foreigners get too pissed off, I see mortgage rates jumping.

That's right. Risk has been underpriced for a few years, here. If we lose the confidence of the world CBs, they might have mechanisms to force us to price in the proper risk premiums by raising their own interest rates.

Oh, I'm so tempted to post the link to my Youtube Star Wars parody movie.

Millennium Bank is regulated by the International Financial Services Authority (IFSA) to conduct international banking business in St. Vincent and the Grenadines.

I know a guy who invested $50,000 in a bank in the Cayman Islands. The bank disappeared and so did the money. No FDIC. No US laws.

"The phantom bid is one of the oldest tricks in the book"
MIKE DONIA, veteran Toronto realtor

The secret's out on phantom bids
Registry, open bidding needed to stamp out phony offer scams, some realtors say
http://www.thestar.com/News/GTA/article/256968

The incoming head of the Toronto Real Estate Board has come out swinging against phantom bidding tactics after denying they even existed when she ran for the job three months ago.
"It's dirty realty, it really is," Maureen O'Neill said of agents who fabricate offers during bidding wars. She is now calling on the Real Estate Council of Ontario (RECO) to yank the licences of agents convicted of using phony bids.
"Boot them out, we don't need them in the business," O'Neill said. "I don't think these people should be allowed to sell real estate."
Phantom bids can be used by selling agents to spark extra rounds of bidding or to spook potential buyers into rushing or raising offers. The practice is considered a breach of ethics under the Real Estate and Business Brokers' Act of Ontario – administered by the Ontario council – and realtors who are caught can face hefty fines.

Bidding and bitterness

http://www.thestar.com/article/256092

Many in the industry will say – off the record – that selling agents are attempting to manipulate the process and scare potential buyers into raising or rushing offers with talk of bidders who may not exist.
They say there's nothing to stop agents in Ontario from doing so because – unlike in Quebec – they are not obliged to disclose bid amounts to potential purchasers' agents in an open process.
The lack of transparency means some competing bids, especially those that have been "faxed in" to the selling agent, can't be verified.

I see little enough from the Bernanke Fed to warrant some of the darker characterizations turning up here.

Cramer made an impassioned - putting it kindly - plea to have the discount window opened. Well, it always is open, as BB cooly pointed out. How this makes Bernanke a Wall St. patsy requires something beyond logic.

As to Fed response to the Congress. It's taken the form of a few reminders to various representatives that the Fed is doing what prudently may be done and rather pointed questions regarding what the legislature has undertaken in the way of helpful activity - essentially 'I'm doing my job. Can you say the same?'

People who select a single Bernanke quote as the basis for every prognostication regarding the Fed's intent or likely path need to stop and think whether or not that makes sense. It is clearly simplistic, but if that's the way you examine probabilities, then what are you doing here?

As long as its chairman has served at the pleasure of the executive and subject to confirmation, the Fed never has had a purely independent status. It is possible to act in a way sufficiently counter to the administration's wishes as to endanger one's chairmanship.

Paul Volcker was the last called upon to take stern measures, but he was able to communicate well with the Reagan White House and to lay out his intents and reasons in a way which satisfied the President. That is not the situation today - if only because GWB is not Reagan.

I don't presume to know what will happen this week. I do know the Governors will be taking a look at CPI/headline inflation numbers before you and I will. They're not about to be caught flat-footed by any surprise in those statistics.

For all the inflated rhetoric here, I can't for the life of me see the current Fed Chairman as anything but an island of sanity in an otherwise disordered economy.

I am almost in disbelief about the Bank Run in England. I wonder if such a thing will happen here in the next 6 months. I bet when the Bank Runs start here, we will see breaking news stories about shoot outs between bank customers trying to get their money. Why invest in Gold? Investing in lead may be the more prudent thing to do :)

I don't know what will happen in the next 6 months, but I am nervous. I am only 27 and have very little life experiences to have a well refined intuition. I do know that I don't understand why this crazy lending was allowed to occur. It can't lead to anything good.

I also don't understand the gold bugs. You can't eat gold or use gold to make food. If I had to choose a commodity to rely on as an inflation hedge, I would choose oil any day. You can at least use oil to make food and consume oil for other things.

Has it ever happened that Fed rate is cut while mortgage rates go up?

I should rephrase my question: Has there ever been a time when the Fed cut rates, but the mortgage rates increased after that cut?

It's Cargo Ben now:

http://www.stockmania.com/2007_09_17_archive.html

I have heard an interesting line of thought that goes like this:
A temporary large drop in the Fed Funds rate will allow serious home owners a chance to refinance into a sustainable payment. It may even give speculators a chance to dump their properties. After a brief window to allow sanguine parties a chance to fix their "I didn't understand the risks' real estate woes, the Fed will start chasing out inflation for real. The kind of inflation that comes from China dumping the dollar and our currency tanking. Greenspan has thought rates may need go as high as 10%. And before we discount Alan, who admits he missed this bubble, he is still an excellent economist. Where we bubble bloggers saw this one phenomanon, do we all have his breadth of economic savy? For my part I am counting on rates going to 4.5% by year end, then watching 2008 and 2009 return to the Volcker years.

Lowly Smart,

I don't know historically if that has happened, but I don't see why it couldn't. The mortgage rates aren't tied directly to the fed rate, there is certainly an element of supply and demand on the secondary market. If nobody wants the subprimes or jumbos anymore people will have to pay more for them to make it worth the while for the secondary market to bother with the risk.

I think the All-Knowing's (Greenspan's) warnings about housing will even spook a few of the perma-bulls who used to post here.

Interesting story on Australian '4 Corners' (high quality exposés and journalism) on the US mortgage meltdown. Streaming video of the TV broadcast, about 45 minutes. Many shots of Riverside...

Four Corners - Mortgage Meltdown

justme:

You're right, taking a direct 25% hit would be disastrous. However, you have to look at how these loan bundles were securitized, the wizards on the street sliced and diced the default risk into tranches, in effect asking all holders of the debt to "take a number" setting the order in which they will incur losses. Those at the front of the line, the so-called equity tranches, will lose 100% of what they put in. Those are the hedge funds that bought the toxic waste tranches. The highest-rated tranche takes no losses until the two lower tranches have fully taking hits.

There are indeed banks with some of these bad loans directly on the books, or bundles of the lower tranches on their books. Most banks keep these loans to a small % of their total assets, so if they absorb a 25% loss, you have to view that in context. Even the big sub-prime lenders like Countrywide may not actually become insolvent as a result of their losses. IMO where the virus escaped the lab was in these "AAA" rated tranches that were sold to institutions (like money-market funds) that normally cannot own junk debt. This is the vector by which the contagion has been allowed to spread and infect the whole market. If not for that we would all be watching with detached amusement as greedy lenders with shoddy practices when under one by one.

LowlySmartRenter Says:
I should rephrase my question: Has there ever been a time when the Fed cut rates, but the mortgage rates increased after that cut?

"It is different this time."

"We are in a new paradigm, called 'I didn't get it'."

SP

Hey, did anyone else see the Alan Greenspan interview on 60 Minutes last night? Now that was some major league CYA!

DJM reminded me of a backstory.

Where is Moody's et al. in their re-rating of CDOs? Will they do this quietly, issue by issue, or will they issue a press release announcing that they have re-rated a whole swath of heretofore "unknown" toxic waste?

Next, what happens when institutions who can only hold high grade paper are forced to dump? Who will buy it in the current state of cash hoarding? And, how do you value it? I think it is noteworthy that the market and valuation methods for asset backed securities is beginning to mirror that of the underlying assets.

DJM,

I'm definitely not disagreeing with you. The loss mechanism that worries me is that even banks (not just investment banks) apparently are on the hook to buy back their lossy paper if the losses exceed some threshold.

If a particular bank was a source of a lot of junk, does that mean that their low-tranche junk will all come back to roost in an unbundled, concentrated form? I do not know, but it could be. And then suddenly, sizable percentage losses of principal do not seem so far-fetched.

Duke :

I am one of the bloggers who despise what The Great Greenspan did. And it's not because of his knowledge of economics - rather because his tendency to not use it. Did he learn anything from the history ? Wasn't he the chairman when the dot-com bubble popped ? When so many people could see this lending situation clearly, he says "I didn't get it" ! What happened to "The buck stops here" ?

And he was not just an economist. He was a f@cking FED CHAIRMAN. He was supposed to GET what the banks were doing. Oh please, he did get it alright. He thought he could tame the monster later. He was actively encouraging the behavior by asking people to use the new mortgage products.

The fiasco is not caused by doom-gloom bubble bloggers who get schadenfreude from misery of loanowners. Mr. Greenspan is one main policy maker to blame. I hope there is such a thing as hell.

There are so many "For Sale" signs popping up in my neighborhood, most have "For Rent" signs attached. What moron would rent a house month to month for the same rent on a 12 month lease?

thenuttynetron :

A mini bank run already happened on Countrywide here. It can happen here again. I am not going to lose sleep over it. You cannot prevent it. You cannot predict which bank will go under. So spread your money in many banks.

If you want to understand gold read Mish's blog. He has many times explained that gold is not a good inflation hedge. It's a good hyper-inflation hedge, which most likely will not happen. He argues that it's a good deflation hedge and that's why he likes it.

NOT A FINANCIAL ADVICE

A new Realtard (tm) quote, from this past weekend:
"Bay Area house prices won't fall much because the median is going to keep them up."

My head was reeling from this circular logic, so I couldn't really think of anything to say.

I was driving through a neighborhood near Foothill Expwy and 280, and saw this realtor opening a lockbox for one of his clients, so I pulled a u-turn and piggy-backed on the tour. Since the old faht was nice enough to let me in, I didn't feel like making him look ridiculous in front of his victims... I mean, clients.

StuckInBA
"He thought he could tame the monster later. He was actively encouraging the behavior by asking people to use the new mortgage products."

I respectfully disagree. What Greenspan did was comment academically on a then truism. If you looked at what people would have paid using an ARM versus what they had paid using a 30 year fixed, housholds could save money. He, rather refreshingly, asked people to be smart and didn't dumb down the economics of the situation. Sadly, I think people took his statement to mean, "Go get an ARM and buy that too big house you can't afford". Which, I claim, he absolutley did not say.
With lending standards that allowed people access to 100% financing, the immediate MEW on paper run-ups, knowing they can and will default their first payments on everything was disgusting and all too common.

Here is food for thought. Builders all seem to use the same model on when to buy land and how many and of what size houses they need to build to realize their desired margin. The builders almost exclusively built massive homes on small lots which were normally be unaffordable - barring the historic low rates and then toxic ARMS. The sheer amount of unaffordable housing that was built was shocking. I remember thinking, "What do these people do to afford this?" Apparantly the answer is they could not afford it.

Huh? Didn't you know that Santa Clara county median prices have fallen for the past umpteen months in a row?

Why not use the distortion of mix to our advantage???

"What moron would rent a house month to month for the same rent on a 12 month lease?"

The same moron who would rent a house with a "For Sale" sign still stuck firmly in the front yard.

Or the idiot who would pay $7,400 a month in RENT:

http://sfbay.craigslist.org/eby/apa/423622103.html

“Bay Area house prices won’t fall much because the median is going to keep them up.”

Maybe he's using the Burbed definition of Bay Area - which excludes fake Bay Area places like Gilroy, anything along 880, etc.

"Where is Moody’s et al. in their re-rating of CDOs? What happens when institutions who can only hold high grade paper are forced to dump? How do you value it?"

Good questions all. Some foreign banks may simply hold them to maturity, not having anywhere else to go. Large institutions like Vanguard will probably step in and buy the crap from their own money funds, shifting it to their own balance sheets. Basically no one knows how to value it because all the quant models have to make assumptions about the rate of default, rate of pre-payment, etc., all of which are garbage-in, garbage-out. All that said, the top-rated tranches are almost certainly worth some non-zero amount. There are no doubt some big players out there willing to pick this sh!t up at some hefty discount, salivating at the prospect that current holders will have guns to their heads to unload it all.

eburbed Says:
“Bay Area house prices won’t fall much because the median is going to keep them up.”

Maybe he’s using the Burbed definition of Bay Area - which excludes fake Bay Area places like Gilroy, anything along 880, etc.

Regardless of the definition of the area, it borders on the asinine to say prices won't fall because the median will keep them up.

The sad thing is that the family - dopey white guy, sleepy azn wife, grumpy baby - that he was showing the house to appeared completely hypnotized with this guy. Following him as he walked around, waving his hand and saying 'kitchen', 'master bath', etc. with the air of a conjurer who just made the rooms appear out of nowhere...

SP

Duke said:
What Greenspan did was comment academically on a then truism. If you looked at what people would have paid using an ARM versus what they had paid using a 30 year fixed, housholds could save money. He, rather refreshingly, asked people to be smart and didn’t dumb down the economics of the situation.

While I can appreciate the finer point of your argument, I don't think you can exonerate him of culpability.

There is a reason why kindergarten teachers don't tell their five-year old students about bungee-jumping even though grown-ups do it everyday without harming themselves. IMO, taking on an ARM is analogous to that - it is tremendous fun if you know what you're doing and have a contingency plan if something goes wrong. Not a good idea if you're a dumb schmuck with an overactive entitlement gene that makes you 'reward' yourself by falling into debt that you have insufficient meants to service.

Greedspan was the friggin' Chairman of the Fed. I don't buy the argument that he didn't know what he was doing, and I don't buy the excuse that his 'advice' was misconstrued.

SP

Duke :

Sure, Greenspan wasn't distributing "Come to my ARM" pamphlets near a town hall. But given his desire to get in to Guinness book of world records for uttering the longest sentence in a cryptic manner, I would call his speech "as close to active encouragement as it can get".

More importantly, if it was just an economist's theoretical view, was there an obligatory "on the other hand" part about the risk involved when ordinary individual try to guess future interest rates ?

History will not deal with him kindly.

“Bay Area house prices won’t fall much because the median is going to keep them up.”

SP,

That Realtor (TM) comment really does take the cake. Maybe he thinks the median is this all-protective, immutable thing that flows through the universe... ie, the Force.

May the median be with you...always.
Use the median, Joe Sixpack.
The median is strong in this one...

Stuck and Duke,

Come on now, how many FBs do you really think even knew who Greenspan was and what his job was, much less listened to his blessings on getting ARMs?

skibum :

Agree that many FBs didn't know what this Greenspan thing is and even if they knew had any ability to decipher his particular dialect.

But if he was saying that publicly. I don't know what his actions/words were in private. But evidence indicates that he was either ineffective in combating the lending practices, or he chose not to interfere. That amounts at the least to tacit support. His public speech amounts to encouragement.

And this was not rocket science. So many journalists and bloggers were able to see it. People in high places should be held to higher standard. Else there is no hope for a society. We have apologizers of politicians, CEOs, Fed chairman ... you name it. It may not be intentional spin, but still a spin.

“Bay Area house prices won’t fall much because the median is going to keep them up.”

Sounds to me as if the writer never lived here during the other Busts of early 70s or early 80s or the early 90s....
OK! you werent around then so i forgive you ... but when it drops
as it dropped before regardless of the so called medians... you will learn..

“Bay Area house prices won’t fall much because the median is going to keep them up.”

The fact that this idjit's clients didn't turn around and walk -- no, bolt -- out the door as soon as he said that gives me the shivers. Makes me think that there are a lot more greater fools (with means, no less) out there than I thought.
Sigh.

No city or zip numbers from DQ so we are left to mine the press release for nuggets.
Foreclosure resales accounted for 4.8 percent of August's sales activity, up from 4.5 percent in July, and up from 1.2 percent in August of last year. Foreclosure resales do not yet have a regional effect on prices.
So from these three datapoints, looks like foreclosure resales have been increasing 0.3 percent per month since last year -- this on a sales base that has been decreasing. I wonder at what point it will be determined that foreclosures are having a "material impact". Just for reference, SoCal is at 8.8 percent.

"Bay Area house prices won’t fall much because the median is going to keep them up.”

It just shows that the NAR test should incorporate high school level math for its realtors. Did they even finish high school equivalency?