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New Paradigm? The Rise of Mortgage-Backed Securities
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2006 Oct 24, 7:11am 15,631 views 174 comments
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Allah,
Well, realt-whores are going to find out just like those of us in the securities arena that you needn't have participated in shady "IPO" offerings and late trading to take your turn in the barrel!
The sad part is that most of them weren't really doing anything w/their lives when this came along so I've no idea what they'll "go back to"?
For the small town realtors (while not having a firm grasp in economics) DID have to exhibit a certain loyalty to their limited client base, these folks I DO feel for.
For "big city" realt-whores, they'll move down to Vegas or wherever they feel is nearest to "1999" and ply their trade there! The only thing they know how to do anymore is to sell RE as an investment! That's how they create their whole sense of urgency w/the prospect. They'll boast to their new employer or partners how the were doing X a year in commissions (fabricated or otherwise) and then demand X % in "pay out" and how they're seasoned professionals etc. etc.
When it becomes obvious that their new "target market" isn't paying off either, they'll become migratory in their pursuit of easy money.
Since this thread is starting to deteriorate, I don't feel bad posting a couple of data points from the the "luxury coastal vacation home market".
Here are the prices for a FSBO 1/10 fractional interest in a Sea Ranch home:
2004: $ 85,000
2005/6: $119,000
2006 now: $ 99,000
The owner does not seem desperate as he has less than $85k on his first mortgage, but he has no probelm seeing what the "market will bear". An interesting window as the "comp" is previous shares sold in the home. Wonder if he sold any shares at the $119k price?
I’m getting flashbacks. Soon we’ll be seeing stories about kids at startups rolling around in scooters again. Please, not that.
As I mentioned yesterday, a friend of a friend is at youtube. He's shopping for a helicopter.
As I mentioned yesterday, a friend of a friend is at youtube. He’s shopping for a helicopter.
Maybe he can supplant HeliBen and drop some of his youtube winnings in cash to help the economy along.
Peter P
2006 Oct 25, 6:38am
As I mentioned yesterday, a friend of a friend is at youtube. He’s shopping for a helicopter.
How much is a new helicopter anyway? Last time I checked it costs less than half of a crappy townhouse in the Bay Area.
I have co-workers who own planes.
Water cooler conversation -
Three clerks in my office were talking about the housing market. One is buying now, one bought last year, one the year before. They all have under $100k combined income. One of them apparently has an adjustable that has gone up $1200 over the course of the loan. I keep hearing about all the "rich" people buying - but of the people I know, it's these lower income people who are jumping into the market. I do know one stock option couple who paid cash for two houses - one Santa Clara and one in Santa Cruz.
Other people I know who have bought:
2003 - San Jose, $70k income, $475k house
2004 - San Francisco $1,000,000 condo, $90k income. Bought another condo to flip at the end of 2005 - last I heard it had not sold and he was going to rent it out.
2004 - Santa Clara, $60k income, $400k house/condo?
2004- San Jose, $150k income, $600k house
2005- Santa Clara, $90k income, $550k condo
I just don't see this ending well at all.
Peter P
2006 Oct 25, 6:41am
2004- San Jose, $150k income, $600k house
This should be fine with 20% down.
Peter P
2006 Oct 25, 6:44am
I forgot to mention, they financed the entire amount
They should still be fine, but only marginally. The "San Francisco $1,000,000 condo, $90k income" combination is not very good though.
I hope they will be fine, however, they have one baby and another on the way. The husband is a spender and the wife has left work to stay home and care for the child. So...
The $90k guy - oh brother. I don't even know where to begin. I've known him since high school. He's never been real bright.
Peter P
2006 Oct 25, 6:49am
The husband is a spender and the wife has left work to stay home and care for the child. So…
If they still have 150K income, it should be okay. It depends on how big a spender is the husband though.
@lunarpark,
It's the $90k income $1m guy that scares me the most. yikes.
@skibum - Yeah, I know. Is he an anomaly in this market or...? Scary to even contemplate. I wonder if he knows Casey-
EBGuy,
Yeah, you could say that. Maybe we should have said:
MBS and You!
Avoiding Peer Pressure in the New Paradigm:
That aside owning fractional shares is real popular in Oregon especially in Bend and on the coast. It strikes me that these are some of the most vulnerable holdings (after timeshares of course). If you want a window into what a failed boomertopia will look like go no further than Bend!
SFGuy,
The info there is from First American RE Solutions and appears to be the research arm of First American Title. Dr. Cagan is calling for 266,000 foreclosures in the next 5 years in CA. MORE if equity declines! Just the fact that he's carrying his projection out 5 years leads me to believe that unlike DL he is not calling this month's numbers "the bottom of the trough"?
@SFGuy,
A 20% decline would be highly optimistic for California, Land of Eternal Appreciation. I'd consider the source here, described as "Christopher Cagan, Director of Research and Analytics at First American Real Estate Solutions". Let's face it, forecasts are like assholes, everyone's got one.
That aside, at least he's actually calling for a significant drop, which puts him way ahead of DL, LAY & Watts in terms of credibility. Plus, he's hedging his bets with that little disclaimer "if prices fall 5%, move one row down", etc.
DinOR & I simultaneously posted and basically said the same thing.
Great minds...?
chicken!
I thought doctors had to be gutsy….
@SFGuy,
Not with money! Although I do know more than a few colleagues who are pretty close to being FB's. MD's are often scarily naive about money issues.
HARM, SFGuy,
My mom worked for Chicago, Ticor and American Title over the years. Since almost without exception all of the data they dealt w/was empirical I'd say Dr. Cagan's credibility is in better shape than some industry shills.
Assuming Dr. Cagan's data is good, and that he is simply being hopeful that prices won't fall too far, we can simply slide down the rows in his disclaimer to find the appropriate numbers. He may say "X foreclosures over the next n years", but we can read that as "here's how foreclosure rates are affected by price drops".
The opium analogy is fitting, until we get hooked on the same opium.
I am all for printing money in exchange for real goods from China, and then depreciate the hell out of their reserve, that's what I would do if I were running this country, and I had a whole country of smart and disciplined people to work with. However, that's not the reality.
The status of the world's reserve currency is something that the American ancestors fought hard to garnish. With that status, we as Americans can enjoy higher standard of living at a lower cost, if you ever lived elsewhere outside the US, you would understand that this is about the only place on earth that quality of life comes at such a cheap price, until the housing bubble forms. The whole US economy is largely based on one important assumption: cheap energy. We are able to enjoy cheap energy partially because of our reserve currency status. If we lose that, how much do you think a carton of milk will cost? How much will your amazon shipping cost be? How can people continue to live in the boonies on acres of land, especially in the northeastern corner?
The job migration to China is not worriesome in the sense that it displaces our lower-strata citizens. It is disturbing that in the longer run, once they have a monopoly of supply chain on certain goods, that's when their pricing power begins to take hold, and their knowhow leaps ahead of ours. For example, do you know that starting from 2005, almost 100% of the notebooks in the world are assembled in an industrial area just outside of Shanghai called Kunshan? Notebook assembly used to be spread across Malaysia, Taiwan and Singapore, now, regardless of who you order from, all notebooks are shipped straight out of Shanghai. Grant it, they are still quite low on the food chain, but the extreme concentration of manufacturing in one base is alarming. And, it takes time to break up that clutter of supply chain vendors, even if we want to migrate certain functions to another country in search of even lower cost. They are determined to climb up the food chain, and if we continue to act stupid, they will.
Therefore, it is much better for us to crash now, while having them share the cushion of blow, than crashing later, when they have climbed high enough to help engineer our fall.
Peter P
2006 Oct 25, 10:49am
For a fleeting moment, I sometimes wish for an out-and-out depression….
Sometimes I wish for the Judgement Day.
Person,
Huh? Option on option? Sounds like a bad deal - double the chance of getting someone screwing you out of your winnings and complicates legal recourses. I'm also pretty sure that it would qualify as gambling and securities and be subject to both state law AND the SEC. (Though I'm too lazy to actually backup this opinion with sources).
SP,
DinOR usually has a fit when I bring it up, but I really don't think there should be separate tax treatments for investment income or retirement plans (given that this pretty much drives DinOR out of business - no wonder)
I will now do some preemptive poxing on my own chosen profession, once I completely figure out what that might be.
DinOR,
I don't need a time machine to 1999. A time machine to last year is just fine. I'm not greedy -- two or three multistate powerball jackpots will sustain me just fine.
Lunarpark,
What worries me are the $120K-200K/yr families who bought their primary residence before 2002 and just acquired 3 or 4 "investment properties." Half of my parents' friends and associates seem to fall into this category.
I'm still having trouble processing the YouTube acquisition. My head flash back to 2001 when seniors got great job offers (then lost their jobs within months of starting).
Stop the Presses!
My rent (In Accordance with the Oregon Residential Landlord Act ORS 90.240 (4) (a)), has been raised from $850 to $865 a month! Outrageous! I'm challenging this! Outrageous!
That's pricing power baby!
(pathetic)
Peter P
2006 Oct 25, 11:53am
RE: bubble-proof markets
Too bad this bubble-proof-ness is already baked into the price. As a result, nothing is bubble-proof.
astrid,
It really wouldn't put me out of business (I also manage corporate, charitable and institutional accounts) as well. All I've ever asked for was a level playing field! With the 250/500K exemption on primary residence IT'S FORCING rank and file Americans to play the "buy all the house you can afford and then some" game! Isn't that what mortgage "planners/coaches" broadcast to their "clients"?
If we're going to say no pre-tax contributions to 401K/IRA's that's fine. While we're at it let's not only do away w/the 250/500K exemption let's not re-institute the "one time" exemption either! Just look at how lopsided things have become.
ConfusedRenter,
I've been waiting to see how long it would take for you to cling on to the glimmer of RE bullish-ness from that cnn article. Thanks for obliging. Are you planning to use that in your next Realtor newsletter to send out to your clients?
As a counterweight, cnn/money has also published places NOT to buy, as they are "bad investment" areas because of "too much appreciation" recently:
http://money.cnn.com/popups/2006/biz2/newrules_wherenot/index.html
Looks like the vast majority are CA (central valley in particular). Yes, I know, this is just cnn/money talking out of their asses. But, what the hey.
BTW astrid,
I've been having trouble getting to your greencrabs blog. Have you noticed any trouble today?
skibum,
Unfortunately, all the blogspot blogs seem to be down right now. They did an upgrade this afternoon and the upgrade may be having trouble taking.
Sorry about that. It must be my bad karma against the preferential capital gains tax system.
Confused Renter,
If you didn't bother to read the contents of the threads you posted on (which would answer your question very clearly), then what you really need is a reading tutor.
ConfusedRenter Says:
What are your thoughts if the Fed cuts rates back down to 4% from 5.25%?
ConfusedRealtor,
Why don't you just ask your proctologist to pull an answer out for you?
SP
RandyH - I just saw this artickle in the The Marin Independent Journal. “Home foreclosures in Marin County were up nearly 60 percent in the third quarter compared with the same period last year, Dataquick reported." SHOCKING! I was sure these homes would sell within a week for AT LEAST 100,000 over asking. Boy, was I wrong! What's worse, the artickle also said: "Marin’s foreclosure picture was still rosier than most of the other eight counties in the Bay Area, where overall foreclosures surged 89.2 percent in the third quarter."
Oh well, one mustn't wish harm or agony - so I guess I should just Enjoy the Whether. It was over 70 degrees in SF today.
ConfusedRealtwhore
ConfusedRenter,
Any serious investor will tell you that the expected return on a illiquid investment should be at least be 3% points about a liquid investment to compensate for the risk. Even with if real estate matches stocks over the long haul (which is not possible due to residential real estate having no economic productive capacity after it is built), it's still not a good investment.
The Fed doesn't control mortgage rates, only the federal funds rate. Even without the default risk that has not be properly priced into MBS, 6% is too little return on a 30 year callable fixed investment. Mortgage rates are headed up in the long run regardless of the fed's action. The S&P 500 is up over 10% for the year. The strong stock market performance will shift investment from fixed income to equities.
@SP,
Keep the ConfusedRenter spoofs comin'. I enjoy the occasional chuckle.
Funny you think i’m a realtor. Can you remind me again what your background/occupation/story is?
CR, Why don't you search some of the previous threads and find out. I'm sure it's there. I'd point you to the right thread, but then again, "this blog is so enthusiastic, that by the time i turn around, i can’t find what i posted anymore."
SQT,
Actually the ML article said that Merrill has backed down from their original position of rate reductions starting as early as Jan. 07 to Mar. 07! Had Cornfused Realtor read further he might have noted that Credit Suisse is of the opinion that we'll be at 5.25 for quite some time. Not to knock Merrill but Credit Suisse has an equal right to their forecast.
I'll agree, even if we lowered the overnight lending rate back to 1% it would only add volatility, not salvation.
Allah,
LOL! Would it have killed you to just come out and say it? I know, I know we don't want to come off as being prejudicial to FB's!
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This is a topic that seems to come up fairly often and I think is worth exploring: Does the rise of Mortgage-Backed Securities (MBS) and Collateralized Mortgage Obligations (CMOs) represent a true "paradigm shift" in how risk is decoupled from mortgage originators/lenders and transferred to individual investors and taxpayers? Is this a temporary trend soon to follow unprofitable Dot.coms into the dustbin of history, or a true revolution in risk transference?
MBS/CMO goal: Privatize profits, socialize risk
We have often derided those in the REIC over the past year or so who have claimed that the unprecedented run-up in housing prices over the last 6 years was a "new paradigm", i.e., a permanent, historic shift in severing the traditional relationships between incomes, rents and RE prices. But what if there's a kernel of truth to this?
We must remember that MBS/CMOs are what have made issuing NAAVLPs and I/Os profitable, even with tiny risk premiums, because of that oh-so-critical risk-transference. Even the most toxic option-ARM is profitable to the originating lender –in fact, the fees & points (profits) are far higher on toxic loans than they are on traditional 15/30-year FRMs or amortizing ARMs. If you're a lender, why wouldn't you want to take boat-loads of risk-free (for you) money? You'd have to be crazy not to, right? Of course, there's always the possibility of repurchase agreements or class-action lawsuits if things get really bad, but, hey that's for some other guy to worry about. You're in it for the short-term profits and couldn't care less about the long view, right?
The new MBS/CMO risk transfer model has been working SO well for lenders that I fear only a complete economic meltdown (resulting from it) would deter banks from voluntarily continuing its use in the future. And, as Randy has pointed out, the current anti-regulation/pro-banking bias in government is so strong, involuntary regulations (with real enforcement) are pretty much out of the question –for now.
I believe our best hope where toxic loans are concerned is for MBS investors to begin to recognize that the underlying risk has been severely under-priced and demand greater premiums and/or risk disclosure. This should result in higher mortgage interest rates and the return of "quaint" things like full-documentation, which in turn would deter widespread use of these loans. Of course, this would require FB defaults on a massive scale, something we could expect to see beginning next year, and continuing in waves for several more years.
"Next year, a trillion dollars worth of mortgages will have their rates reset, said Dan Mudd, chief executive officer of Fannie Mae. That's a significant share of $9 trillion in mortgages outstanding, he said."
Source: Reuters
Add to that the roughly $.5 Trillion that started resetting this year, and another $1 Trillion that will start resetting in 2008, and you have approximately $2.5 Trillion in neg-ams and option-ARMs that will be resetting monthly by end of 2008. We're not talking small resets either. When you factor in a typical 1-2% "teaser" shooting up to LIBOR + 2-3% (typical mark-up for option-ARMs), PLUS the loans starting to amortize (having to start paying back principal as well as full interest), payments could shoot up 100-200% for Mr & Mrs. Howmuchamonth.
Thoughts, opinions...?
HARM
#housing