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New Paradigm? The Rise of Mortgage-Backed Securities
invite response
2006 Oct 24, 7:11am 15,514 views 174 comments
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skibum,
LOL! Yeah until Randy H straightened me out I was thinking "buzzard puke on a door knob" or "owl sh@t on a mirror"?
I think I'm starting to conceptualize where Randy is coming from and it (in my mind anyway) centers around a "known and quantifiable rate of descent". Since we aren't in an economic backdrop that permits us to say, "Median price decreased 9.7% YOY so divided by 365 that translates to a .0265% a day decline in sellers home value".
I think that IS what happened but we could only determine that THIS morning and in retrospect at that!
RE prices ARE sticky! However; given what we now know this is the first data we've seen that should cement in seller's minds just what the consequences are for "taking it off the market and re-listing in the spring"?
"Nominal Contract Performance"
Wow! How many times have we heard someone lament being the first tenant in a new office bldg. or strip mall?
"Yeah, they stuck it to me. I was promised all this foot traffic and for a year I was the ONLY guy at this location! NO coincidental business at all! I'm lucky I survived. Now these "new" guys are feeding off of ME and their leases are MUCH lower. Yeah, they stuck it to me".
Randy H
2006 Oct 26, 3:21am
Ok, you win Allah. You believe Adam, a San Francisco based business consultant, is the Editor in Chief of the highly intelligent and very enthralling San Francisco real estate blog SocketSite and a member of the Real Estate Blog Squad.
And I'll believe N. Gregory Mankiw
What is a "blog squad"? lol
@Randy,
I just hope Mankiw isn't associated with his other Crimson colleague, Nicholas Restinas, that REIC lackey.
Randy H
2006 Oct 26, 3:35am
words like sticky have a broader meaning than when they refer specifically to RE.
Thanks for clearing that up. So in RE the notions of economics don't hold. I'll accept that. Then we shouldn't be invoking any economics at all when trying to understand the RE market. Let's use darts. I'll agree darts are probably more accurate (unless you're talking about my dart game).
Randy H
2006 Oct 26, 3:42am
skibum,
Mankiw isn't a RE lackey. Many criticize him for being a Reagan-style Republican lackey, being he is the anointed saint of neoclassical economics, and thus the author of many texts invoked by supply-siders.
I could have referenced many others from less notorious universities, like Pindyck. If I recall he discusses price stickiness in purely micro-economic terms, using empirical data from various markets to prove the theory. I think it was he who tackled markets people thought as "not sticky", like currency FX, and then showed they are in fact very sticky due to "non-maximizing behavior", which Mankiw would call irrational, but behavioral economists/finance would call "the real world".
Randy H
2006 Oct 26, 3:49am
Allah,
You know, not everything of value is Google-able; in fact the most valuable stuff you actually have to read in a book or pay for a digital license.
I already referenced everything. But for extreme emphasis:
N. Gregory Mankiw, _macroeconomics_, fifth ed. (c)2003.; Worth Publishers. ISBN: 0-7167-5237-9. p515, table 19-2.
Elaborations on specific markets:
"On Sticky Prices", N. G. Mankiw, Chicago: University of Chicago Press, 1994), pp117-154..
@allah and Randy,
To end this pissing contest about Mankiw's stickiness credentials, here's a link from Randy's own link to Mankiw's page at "that school in Cambridge":
http://www.economics.harvard.edu/faculty/mankiw/papers.html
All his papers listed are pdf downloadable. Upon my untrained cursory read, there are a few opining about price stickiness vs. information stickiness. The latter does seem like an interesting concept - that economic decisions are made based on old information (lagging indicators, slow dissemination of data across the economy, etc). Cool stuff.
HeadSet
2006 Oct 26, 4:10am
DinOr says
"To help me put this in perspective 1970 was the year I discovered that not all girls were “ickyâ€. "
Or are they just "icky" on the way down?
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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