Monday, May 23, 2005

The MBS House Of Cards

Credit rating agencies grade mortgage pools up-and-down every day. To get a sense of what's going on, here is a May 20th example from Fitch. "The negative rating actions, which affect $526.8 million of outstanding certificates, are taken due to the continued deterioration in the performance of the underlying collateral."

"In the eight transactions that experience downgrade actions, the high level of losses incurred has led to substantial and rapid decline in credit enhancement, particularly in the form of overcollateralization (OC). In the most severe examples, OC has been exhausted and the most subordinate certificates have suffered principal write-downs."

How about the good news, the 'affirmations' of credit? "The affirmations reflect credit enhancement consistent with future loss expectations and affect approximately $1.49 billion of outstanding certificates. In addition, the affirmation..reflects a guaranty provided by Freddie Mac.. reflect a guaranty provided by Fannie Mae..reflect a guaranty provided by XL Capital Assurance Inc.."

Where is this collateral? "All of the mortgage loans in the aforementioned transactions were either originated or acquired by Long Beach Mortgage Company. The mortgage loans consist of fixed and adjustable rate subprime mortgage loans and are secured by first and second lien mortgages or deeds of trust on residential properties."


At 9:56 AM, Blogger John Law said...

Salsa Dancers and Stunt Men? Must Be a Miami Condo Project

At 10:13 AM, Anonymous hortense said...


This is where the rubber will meet the road. If/when we begin to see the rating agencies start downgrading some of this junk debt on the basis, the credit squeeze will commence.

As you say, it's a house of cards (literally). But it's supported by the ratings agencies. When they start kicking out the supports, the cards will fall.

At 10:19 AM, Anonymous boulderbo said...

bingo, we discussed this a few days ago. fannie and freddie have been providing credit enhancement to portfolios from the likes of long beach or novastar for several years now. fannie/freddie repackage and sell the higher yield paper (with those enhancements) to investors who believe that have the full faith and backing of the us government. should that sentiment change (ie the gse's ability to cover all of these portfilios) there would be a rapid chill in the feeding chain for these junk mortgages. anybody that has dealt with long beach knows had bad their portfolio is.

At 10:22 AM, Anonymous Loren said...

Anyone who has watched the credit markets the last couple of years knows how well the credit rating agencies are doing at evaluating risk.

I think it's likely that there will be a really big failure before the ratings change.

At 10:42 AM, Anonymous Anonymous said...

As I posted once before, I think this blog and it’s posts can become a real-time search for an instant bubble pop, as well as therapy and comfort for those who are bitter, jealous, or otherwise adversely affected by the housing bubble. I would assume most readers of this blog think we are in a bubble, therefore; it would be helpful if the discussion moves from “Hey, some 25-yr old idiot just bought a condo in Vegas…I hate him and I am so bitter because I still live in my mom’s basement…” to more discussions of how, why and when this bubble may or may not end. I have seen some excellent posts on this discussion, and I would like to add my thoughts (whatever they are worth…probably zilch).

First, Bill Gross, in his PIMCO May/June outlook states (or at least my interpretation of what he states) that he expects interest rates (3-5 year horizon) to remain low. He forecasts that the “Bretton Woods II policy” of excess U.S consumption with excess Asian exports, though this policy is very tenuous and fragile, will continue. In my opinion, the assertions in his outlook reinforce the theory that the housing bubble may not pop, but just slowly deflate so that housing becomes a low return asset for several years.

Second, many posters, in a fevered search for the sound of the pop, continue to salivate over a banking-mortgage lender-Fannie-Freddie-meltdown. But they are missing the big picture… Fannie and Freddie aren’t at the end of the line, Asia is, and as long as it is in Asia’s interest buy our debt, there will be no U.S. meltdown. So if you hear about some rumblings at Fannie Mae, don’t start jumping up and down and start planning to move out of your mom’s basement…only do that if China says they no longer want our 10-year. And then housing might be the least of your concerns.

At 10:56 AM, Anonymous Anonymous said...

Bubbles go on for longer than anyone ever thinks they can.

Sometimes there is a seminal event, sometimes not.

It hinges on market psychology. This blog provides an excellent service to the economically self interested parties that dominate most of the mainstream media coverage of RE.

Just like life there are bitter people everywhere.

At 11:22 AM, Blogger Tim said...

Anon 10:42

Foreign central banks were net sellers of U.S. debt for the most recently reporting period
Fears for dollar as central banks sell US assets

At 11:28 AM, Anonymous Anonymous said...

"Fannie and Freddie aren’t at the end of the line, Asia is, and as long as it is in Asia’s interest buy our debt, there will be no U.S. meltdown."

Without Fanron and the like, the securitization of mortgage will come to a halt. Liquidity will dry up. The MBS market will crash. No one will buy them anymore.

At 11:30 AM, Anonymous Anonymous said...

10:42 unknown/anonymous -- I read this blog far more to learn than to contribute and am grateful for the observations and analysis therein. I've read the Bretton Woods analyses in fair detail. I am pessimistic about the real estate market but am not bitter, young, single or rich. I'm a bear participating in a bear blog, as I understand it.

Thought I read that Warren Buffet essentially shares our sentiments and is holding a ton of cash, waiting for a pop and good deals to buy thereafter. He's got a lot better track record than anyone else I've been reading about.

I'm not sure whether your tone is imperious or just negative, but it seems inconsistent with the generally pleasant banter I regularly read here.


At 11:31 AM, Anonymous JJL said...

In response to the Anonymous 10:42 am post, Yes I am Bitter. I have saved tons of cash, sold biotech stock options 1 dollar from the all time high during the great 2000 nasdaq boom, have zero debt, budget well, save money for later, 401k, etc and because of this housing mania I cannot purchase a decent home in my area without severly changing my lifestyle and financial goals. As for my moms basement, I actually lent her the downpayment for her 92,000 dollar home in northern california, which she has now flipped for 220,000 in just 2 years. I am not bitter becuse I missed some big move in real estate, but beacause things are so crazy that I cannot buy at all. Meanwhile fools that make 1/2 as much as myself are charging ahead with IO loans without any savings or financial backup at all. I say good luck to all whatever your situation, but I just want a reasonable home at a reasonable price.

At 11:32 AM, Anonymous Anonymous said...

anon 10:42

For every unabashed bull like Bill Gross there is Bear. Check out Nolan's latest credit bubble update:

"I have to this point disregarded “Bretton Woods Two” propaganda. The fanciful notion that the concomitant ballooning of U.S. current account deficits and Asian central bank dollar holdings comprise a stable and sustainable monetary regime reminded me too much of the convoluted New Paradigm metrics and “analysis” spawned during the late-‘90s manic technology circus. I am again reminded that there is a high correlation between the length of blow off periods and the capacity to relish nonsense. The current global currency arrangement evolved out of the necessity of managing escalating U.S. profligacy and the attendant precarious global financial flows. My notion is that Global Wildcat Finance is no more a lasting currency regime than wildcat banking was an enduring banking system. It works miraculously only while it works...“Bretton Woods Two” proponents are content to extrapolate the enormous growth in Asian central bank balance sheets over the past few years. But bankers such as Mr. Park are undoubtedly today cognizant of the risks associated with continued monetization of U.S. Current Account deficits. There are internal domestic and regional economic and financial issues, as well as the risk of loss on dollar assets. And one should expect the enterprising Chinese to join the Korean bankers in the pursuit of “profitability” with respect to their reserve positions. Would they play against the hedge funds?

If there is a crack in Bretton Woods, there will be a serious spike in bond yields thus spelling an end to the housing bubble.


Former owner renting and not living in my mom's basement.

At 11:48 AM, Anonymous Insignificant said...

RE: (only do that if China says they no longer want our 10-year. And then housing might be the least of your concerns.)

The issuing of 30 year US Treasury notes (in Oct?) - I read somewhere (FSO?)that this will cause people to leave the 10 yr notes for the 30 yr notes. The appearance of the 30yr, changes the attractiveness of the 10yr.

At 12:08 PM, Anonymous Anonymous said...

11:48 -- I read the same thing. I suspect 11:42 was referring to long-term bonds as a category, whether 10 years or longer.

At 12:10 PM, Anonymous Rob said...

"Thought I read that Warren Buffet essentially shares our sentiments"


I think Buffet said in the last shareholder meeting, that he thinks they will be able to do something screamingly more intelligent in the next 2-3 years.

I think he is practicing his long help philosophy that the first order of business is not to lose principle.

This guy is who he is because of less than 10 major plays.

At 12:20 PM, Anonymous nostradamus said...

(for those who are bitter, jealous, or otherwise adversely affected by the housing bubble)

Compared to some other sites, I think this blog is relatively free of bitter, jealous contributors.

If many are like me (and I suspect they are), we just want to correspond with those who are seeing the same signs we are and discussing it.

I must admit I do succumb to bitterness from time to time and no doubt would engage in a certain amount of schadenfrade should the market choose to plummet someday.

But overall, I'm more amazed than embittered by current conditions. I had the opportunity to participate in the dotcom frenzy close up.

As a business owner in SF during the late 90s, it was hard to understand how other startups---which had no revenues or prospects---could somehow find millions shoveled under their doors, while I was struggling with my legitimate business. I too attempted to get VC funding until I realized I would have to essentially make up whoppers to get their attention. It ended well, however, when I was able to sell my company to a dotcom in early 2000 for much more money than I felt it was worth.

With real estate, I am similarly mystified, since I have owned income property in California for a very long time. It has again ended well, since I was able to sell off much of my stake last year for significantly more money than I felt it was worth.

So though I have benefitted immesurably from these bubbles, I still question what is happening and find myself unwilling to chase these markets higher.

So I'm neither bitter nor jealous. Having seen this before, sign me confused and concerned.

At 12:20 PM, Anonymous Anonymous said...

Just got this John Murphy commentary:
"WILL CHINA BURST HOUSING BUBBLE ?... The housing market remains strong thanks to historically low U.S. interest rates. That latest housing boom began in 2000 when the stock market peaked the U.S. rates fell to the lowest level in fifty years. The fact that long-term rates have stayed so low has prolonged the housing boom. That's where China comes in. China buys a huge amount of U.S. debt to keep its currency pegged to the dollar. That's helping to keep rates down. What happens if the Chinese bow to global pressure to revalue the yuan? One side-effect could be higher U.S. interest rates, which would endanger the housing sector. Higher rates would be caused by less Chinese buying of U.S. debt and a rise in imported goods inflation. There are some analysts who believe that the market has another major downleg coming which could match the 2000-2002 drop. One scenario that could cause that dire forecast to materialize would, in my view, be a collapse in the housing market (due to rising rates) at a time that the stock market and economy were already starting to weaken."

At 12:32 PM, Anonymous sdrenter said...

anon 10:42,

I am not someone who is bitter or jealous, or in need of comfort or therapy. I am not one who will be jumping up and down when prices correct either, which they will, quite significantly, in my opinion, especially here in San Diego. For we will all be impacted negatively. I am self-employed in a profession that typically takes a hit in a recession.

I am renting in San Diego, not living in a basement. In fact, I'm living in a very nice home in a nice neighborhood, paying about 1/2 as much as I would if I were to buy a house like this. Last year, I sold my home that had more than doubled in price in just 3 years. My equity gain is real now, in a safe place gaining interest, not exposed to falling home prices. I expect that I will buy my next home in a few years, at about a 40% discount to today's prices in San Diego.

Will I be happy and excited about other people's misfortune? No. But, people make choices in life and there is risk, and there are consequences. I took a risk when I sold my house, and feel that my risk and patience will be rewarded when I am able to buy at a bargain price. And people are taking a risk when they are buying now. Many of them will have to sell their homes, and people will have to buy those homes. And the people who buy them in a falling market will be taking a risk too.

I've heard all of the counter arguments from people who claim this correction won't happen. But the only ones who ever disagree with me are either those who aren't really paying attention to what's going on, or those who have something to lose and will be hurt the most, i.e. homeowners who stretched themselves just to get in, because they feared they would be shut out forever; people who bought with ARMs that will adjust, and are counting on appreciation in order to deal with their inevitable higher payments; or people who are profiting off of the housing boom.

In response to the argument that the bubble may just deflate slowly, or that we may have a "soft landing", or prices will just stay where they are for awhile, I disagree, it's just wishful thinking. Remember, this bubble, like every other bubble in history, was caused by psychology, and will be brought down by psychology. Yes, when prices stop rising, or sellers can't get what they want, they can just take their home off of the market, they don't have to sell. But what about the speculators? They have no intention of holding on to a house or condo that is not appreciating. They will all head for the exits at once. A home is not like a stock that can be sold at a moments notice. And what about all those with ARMS, and interest only loans? Lots of them will have to sell when they can't make their payments. And what happens when homes flood the market in droves? Prices fall, banks become motivated sellers, willing to take less to sell fast in order to minimize their losses. But the buyers will be on the sidelines. As excited and motivated everyone was to buy in a rapidly appreciating market, buyers will be just as motivated to stay out and not want to buy in a falling market, until prices fall enough. There will be many who will have to sell; but a buyer never has to buy.

I read this blog regularly, not for therapy or reassurance, but to stay informed. I really don't recall reading any comments from bitter or jealous people; ironically, the tone of your post is the most bitter I've seen. Perhaps you have something to lose when this correction takes place?


At 12:56 PM, Anonymous Loren said...

I'd rather there was no bubble in the first place. It is best that it not grow any larger.

As far as Freddie/Fannie, they are not necessary for the bubble. There are all kinds of other entities selling MBS (Countrywide, Citi etc) as well as the local banks who can retain mortgages in their own portfolios.

I'm not even convinced that Asia is the end of the line.

I'm a little bitter because of the involvement of people who ought to know better (Greenspsn etc) and who draw a paycheck from my taxes.

I work in a business that is primarily providing parts for consumer electronic devices - I'll be hurt when this blows up too.

I am not adverse to pain as long as it's necessary and something can be gained from it. I see this whole housing thing creating a lot of unnecessary pain. I'm also frustrated because most of the primary culprits won't be the ones suffering.

At 1:02 PM, Anonymous Anonymous said...

12:32 SDRenter -- I agree with you. My guess is that the poster is someone in the financial services or construction industry with a mission of trying to tone down our type of arguments lest they become too noticed in the mainstream media. If he/she just wanted to exchange views that are bullish, there are blogs for that, and there are chat rooms for lively debate, as it is more politely called. Chip

At 1:23 PM, Anonymous Anonymous said...

"Higher rates would be caused by less Chinese buying of U.S. debt and a rise in imported goods inflation."

China and Japan are already significantly slowing their accumulation of treasuries. For some reason, the Caribbean (hedge funds?) have basically picked up the slack to the tune of $100B a month. If this didn't happen, long rates would already be going up.

I haven't fully figured out what the hedge funds, or the Fed is up to on this (maybe someone that's a bit smarter can explain) but it doesn't seem like a good development for the dollar to have so much speculation going on.

At 1:38 PM, Anonymous Anonymous said...

i keep reading and reading abt this how higher rates will kill this r/e wont be rates that kill this mkt but rather there will be no more fools left to buy...

in fact i am of the camp that rates will go lower and the mkt will still go down. just look at today's bond/notes new low on yields...(maybe we r modeling off japan)

exactly when this top will implode is beyond me...but it will happen.

people sit tight.

At 1:44 PM, Blogger John Law said...

it kills me that people and pension funds buy these MBS but probably don't figure they are so risky...afterall, the financial sector bundles them up to make them less risky.

At 1:46 PM, Anonymous Anonymous said...

In about 6 months short term rates will be higher than 10 yr bond, meaning it will be inverted. Small recession will follow with few jobs lost and mild slowdown in housing.

China will eventually drop the peg but we can't wait that long.

I do expect some scandals and one or two scapegoats but i also see Govermnet bails some of them. Recently Republican Congress asked for even more loose lending practices.

Unfortunately folks, you just like me, have been on the fence hoping for something Alan never had in mind.

At 2:05 PM, Anonymous Anonymous said...

Has anyone seen reasonably trustworthy links/articles that speculate intelligently about where this Caribbean money is based -- where it is coming from? I'm assuming it is a far larger sum than "Say Goodbye To Your Economy" Soros can muster.

At 2:07 PM, Anonymous Anonymous said...

Forget about the "my expert is smarter than your expert" malarky. Buffett had a 50% draw down a few years ago, and Bill Gross goes around on TV looking like he does in the age of hair plugs. You gonna trust those guys? There are no experts. All you gotta do is show your 7 year daughter a monthly chart of Sun Microsystems [SUNW] next to one of Toll Brothers {TOL]. She will tell you TOL looks just like SUNW did in Oct 2000.

At 2:49 PM, Anonymous powerpuffgirl said...


I've been feversishly looking for the answer on the Caribbean treasury thing, as I believe it is of critical importance to the housing market.

Here's one article:

His take is that the the Fed is hiding it's identity by purchasing treasuries through the Caribbean to disguise the fact that foreign investors are pulling out of the bond market in droves. Is this just a paranoid delusion? Time will tell...

At 3:53 PM, Blogger Thomas said...


"There will be many who will have to sell; but a buyer never has to buy."

Well and succinctly put.

At 7:20 PM, Anonymous Anonymous said...

PowerPuffGirl -- thanks -- I read the article and it seems pretty plausible. Only a government has that much money. Guess I'm way too naive for my age, but shouldn't this sort of chicanery be a big illegal no-no? And why are none of the sycophant media mentioning it? Maybe one of the Internet news sources will investigate and report. Sure can't count on the Aged Three TV sources.

At 7:21 PM, Anonymous Anonymous said...

re "why are the hedge funds buying clownbucks?"

its my understanding that, after significant losses (GE, Ford bond downgrade), they're raising cash to meet redemptions. or so i read on

At 8:55 PM, Blogger WillM said...

I am one of the bitter people. I have been renting for many years (now 46 years old), and was planning to buy my dream home with all cash (~$250K) 2 years ago. I am a hard working man and saved my money $1 at a time - no IPOs, no Options - just CDs. Now I see losers and bums around me getting rich on this pyramid scheme, and I am left "homeless". I refuse to pay irrational prices. Damn right I am bitter.

At 6:26 AM, Anonymous Anonymous said...

You guys need to get a life.

Have any of you lived through a real housing bubble?

I've seen four bubbles in the past 35 years and every one was exclusively a local/regional phenomenon. And all of them had an oversupply component that just doesn't exist today (except maybe Miami hi-rise condos speculatively built for foreign buyers).

You may mourn your stupidity that you didn't buy real estate in Orange County, Scottsdale, Las Vegas, Boca Raton, et. al. So why rationalize your poor judgment by wishing for a bubble that really doesn't exist?

Get over it.

Want to hear a rational voice talk about real estate? Listen to John Burns:

At 6:53 AM, Anonymous Anonymous said...

Thanks for the warning. Since you found this site you have been warned also.

Nice rear view mirror analysis but I am not interested in what happen the last 4 bubbles.

If you think that the past bubbles are representative of this one you are mistaken. There are many new players. (GSEs and their whole food chain, neophyte "investors", that are holding the surplus of homes and carrying the risk for the homebuilders), RE agents (armies of them), etc.

I could see how a superficial analysis could cause you to think that there is no bubble because there is no visible oversupply... yet.

Why don't you go liquidate every other investment and go buy overpriced real estate.

Oh that's right you are shopping here for a greater fool.

At 8:41 AM, Anonymous Insignificant said...

"buying a house is the most important purchase any family or individual makes. Take time and be sure of what you do first."

So I did, and here I am.
Everyone said, "buy a house now" in 1995. I looked around some and said, "not right now, Im not ready." I noticed the prices of houses and they seemed inline with what I considered to be ok. Fast forward to 2002. I start looking at whats for sale and how much. Prices didnt seem so inline any more. Not wanting to get stuck loosing a house like those in the Great Depression did, I looked into why things worked out the way they did way back then.
In, "The Grapes of Wrath" why did Jobe and his family get kicked out of that house? This should have been an easy task as the many years should have provided a lot of written documentation as to the whys and hows of the Great Depression and the Dust Bowl. All the info I could find was, "clear as mud" until I bumped into & Suddenly things were making a lot of sense, so much in fact that all the other material seemed purposely misleading and purposely difficult to understand. Only from an Austrian view does this housing bubble make any sense. If a person knows nothing of the ABCT, then the housing situation may seem normal and this blog crazy bitter.

Maybe some mention needs to be made how similar todays individual debt situation is to the past i.e. large finance companys seemingly purposely deeply indebted newbie coal and gold miners who purchased shovels and lanterns and an endless supply of goods, enough to bankrupt many. To me, they were very similar to todays high intrest credit cards and IO neg am mortgages. Those miners were also part of a phsycological mania that occured at seperate times in US history all across the country. That is the past that is part of my guide.

Is there a national clothing fashion trend in the US? Is there a local clothing fashion trend in the US? How are they different? If there are both trends at the same time, how do they influence each other and are they different now in the TV- VCR age as opposed to the 1940's in how they operate?

Quantify. I cant quantify or state facts to back up any of those clothing trends (at the moment) but if I came out and said, "There is no national clothing fashion trend, only localized clothing trends" and nothing else, it would be unquantified. That is what makes this blog soooo great, many housing/economic authors here backup what they say with numbers and facts and observable actions. Anyone who disagrees, WITHOUT ANY FACTS TO BACK THEM UP is baseless or a Troll.

Bitter, no.
Cautious, yes.
Renting still.

I wonder this:
In the income equations, if all government worker pay is taken out, would the income v.s. house price appear more obviously unrealistic ? With 14 years of no income growth in the US, maybe there should be an addition to what makes a bubble a bubble. House prices rising with stagnant or falling incomes. It seems Gov workers are artificial stimulus no differant than Fed Reserve actions.

Also, unlike today, many older houses were built very close to each other, why? Was this a popular trend or were houses once spread further apart, and on economic dips the owners built a house in the yard to sell to stay solvent? Why else would houses be built six feet apart in a low population town with plenty of land?


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