by HARM follow (0)
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I'd call this a spring splat:
http://www.housingtracker.net/askingprices/California/SanFrancisco-Oakland-Fremont/
Is there any surprise that people would find a way to funnel profits to the few and spread risk to the many? We have a choice, regulate the industry or pay for it with the money those of us who actually pay taxes pay. I don't really see a third way.
Mike,
Your average garden-variety mutual bond fund (Vanguard, Fidelity, etc.) is loaded with MBSs from the GSEs --check the prospectus. Yes, I know that the GSEs are only supposed to buy "conforming" loans and issue AA-tranche "safe" paper. However, as we've seen already, their track record at accurate bookkeeping and risk-assessment is something less that stellar. Not to mention, that Congress has kept on ratcheting up the "conforming loan" limits, so the distinction between AA and "scratch-'n-dent" is getting increasingly murky.
My big question is this: If the MBS market is going to directly affect 401k's should we all be moving our money into the "Fixed" and "Safe" portions of the 401k offerings? Thus avoiding any undue risk and also missing out on any unexpected profits? Assuming of course the company plan includes an option which has no exposure to MBS's...
Mike Says:
> Retail investors, except in a very few limited circumstances,
> do not invest directly in MBS or CDOs. In some cases, the
> AAA rated bonds are available to ‘qualified investors’, but
> there is no default risk associated with those.
Like Mike I’m bearish on the housing market but can’t even imagine a market so bad where the AAA MBS investors would not get repaid (even US Government Treasury investors have interest rate risk and mid term bond value changes). For an example let’s say that a MBS pool of loans has just 10 $400K loans. A pool never has all 80% loans so let’s say the LTV of the 10 loans ranges from 60%-80% with an average LTV of 70%.
Out of this 70% only about 80% will go to the AAA traunch. So even if every single loan in the pool defaults (my odds of winning the lotto are better than having a 100% default in a MBS pool) the AAA bondholders will only loose money if the value of the houses drop ~45% in value. Even if a region has a 75% drop in value and huge numbers of people default the AAA bond buyers will get paid back.
HARM, I do not directly own any MBSes. However, I do have some fidelity mutual funds in my 401(k), mostly stock. Is there any way some of these mutual funds are invested in MBSes?
That worries me. I have consciously avoided investing in the real estate market and I would be quite chagrined to know that indirectly I still am.
So the general consensus here among the professional finance types is that GSE-issued paper (considered AAA or “investment gradeâ€) is basically about as loss-proof as a T-Bill? If so, then I guess us taxpayers have nothing to worry about, bailout-wise.
Perhaps the non finance types (including me) need a primer on what each tranche category includes, and what sorts of loans are typically inlcuded at each level:
AAA/AA?
Alt+A?
scratch-'n-dent?
toxic waste?
Sriram,
Like Person said, even if you hold zero bond funds in your portfolio, the companies whose stocks you do hold might have a substantial position in the MBS/CDO market. Not to mention that the S&P 500 or other stock indexes (Russell 2000, Wilshire 5000, etc.) are bound to include a few home builders and mortgage lenders. I guess it's pretty hard to tell without examining the books of every company, and equally hard to divest from housing 100% --the markets are just too involved in RE to avoid it completely.
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Over the past 18 months or so of regular posting here, I've taken a considerable amount of flack for my criticism of MBS/CDO debt instruments as being a primary cause of the current housing bubble --and why I believe this bubble is so much larger in magnitude and global scope than previous relatively localized bubbles. In particular, I've criticized mortgage-backed securities as being a bankster stealth vehicle, used primarily for transferring mortgage default risk from lenders to main street (retail investors, pensioners & taxpayers). Some of the big "L" Libertarians disagree with me on this.
Some of you might be familiar with my mantra (even if you disagree with it): "Privatize Profits, Socialize Risk".
Well, last Friday my point-of-view just received some direct confirmation from a rather unlikely source: Wells Fargo's President and COO, John Stumpf. You may recall that Wells Fargo is the nation's largest sub-prime lender (see the Mortgage Lender Implode-O-Meter for rankings).
Reuters: Mortgages are different story for Wells Fargo-COO
Here's an excerpt:
There you have it straight from the horse's mouth: MBSs exist primarily for risk-transference to protect the lenders --"it's just that simple".
Oh, and after they repackage and sell these loans to "Wall Street firms" (think Fidelity, Merrill Lynch, Goldman Sachs, etc.), do you think those firms personally keep them on the company's books or re-sell them downstream as fast as possible to retail sucke-- er, investors
(think 401k plans, pension funds, grandma, sister, etc.)? I think we can finally can close the book on this particular "debate" now ;-).[1] [2][1] In light of recent information from Mike, FAB, Randy, etc., I am reconsidering my postition. If most of the default/repurchase risk is concentrated in the lowest MBS tranches, and these tranches are basically off-limits to retail investors and pension funds, then the only people getting screwed are hedge funds and FCBs. If that's indeed the case, then more power to Mr. Stumpf & Co.
[2] Another poster (News) recently (2/22/07) pointed out that the Amaranth Hedge Fund blow-up last September cost the San Diego County employees' pension fund $87 million in losses. While this was related to natural gas trades --not MBS/CDO-- this example illustrates how my original contention about retail investors being exposed to HF/derivatives risk might turn out to be true. Isolated data point, or an early indication of an emerging trend? The next few years will tell the tale, as $Trillions in option-ARM and I/O mortgages start resetting.
Discuss, enjoy...
HARM
#housing