Tuesday, May 03, 2005

US Mortgage System Hangs By Asian Thread

The precarious debt situation grows more so by the day as the mortgage beast must be fed. "Freddie Mac, seeking foreign investment in its mortgage securities to build a capital base, is making a concerted effort to appeal to investors in Asia, an executive at a mortgage banking conference said."

"'From our standpoint and mission, our job is to go out and find more buyers for our securities. It's a wealth of opportunity right now' in Asia, he told Reuters late Monday. Roughly a third of agency debt is held by overseas investors. Analysts say foreign investors could hike their holdings of some asset-backed securities to two-thirds of the market."

The debate on this blog regarding the quality of mortgage data is answered here. "Federal Reserve data show constant and heavy demand for federal agency debt, which includes both mortgage and agency securities, but does not distinguish between the two types." So we "implicitly" guarantee the debt that Asia and the GSE's profit from. Who's responsible for this racket?

With the GSE's pulling back, the Asians will have to buy the subprime bonds, because, well, there are no other buyers. "Some analysts think accounts in the Asia-Pacific region are stepping up MBS purchases because of a dearth of new agency debt as Fannie Mae and Freddie Mac have cut agency securities borrowings as mortgage investment portfolios have shrunk."

15 Comments:

At 10:06 AM, Blogger John Law said...

it's almost like we're back to the 1800s when the US was a (sub)emerging market and foreingers got taken to the cleaners time and time again.

 
At 10:22 AM, Anonymous Anonymous said...

You can say bye bye to american sovereignty. That what will be the final result of the debt culture.

 
At 10:30 AM, Anonymous Anonymous said...

Everything is coming together just like we said it would ! Wow. Who needs economists. If you look back in our discussions, we said that Asia had huge exposure to US RE and that there would be a credit crisis if Asia withdrew its support for MBS.

Is it me, or is the housing bubble crash suddenly accelerating ? It is like everyone suddenly woke up and they are talking about it.

 
At 10:46 AM, Blogger Ben Jones said...

I do think we are at the point of the spear in the discussion, primarily because we don't limit our considerations to include only soft landings. This debate should be occurring at a national level and it would reach the same conclusion.

 
At 10:49 AM, Blogger deb said...

It is amazing how much discussion is taking place on this issue. Big gov't entities and others who have been dismissing the idea of a bubble are suddenly saying price declines are possible.

I just stumbled on the bit...

Fed Governor Susan Schmidt Bies said in an April 18 speech. "However, we are beginning to see signs that housing prices may be reaching a peak in some markets. An increasing share of new mortgages is being taken out by investors rather than by occupants of the property. Some borrowers are stretching to buy their new homes using adjustable-rate, interest-only mortgages. Not only will these households face higher monthly payments as interest rates rise, they are also not building equity in their homes as quickly as they would with a traditional amortizing mortgage."

Greenspan was promoting ARMs openly less than a year ago. Obviously, they see the problems that will stem from all this.

 
At 10:51 AM, Blogger Dave F. said...

"Is it me, or is the housing bubble crash suddenly accelerating ? It is like everyone suddenly woke up and they are talking about it."

I believe you are correct. It seems like the overwhelming evidence is finally starting to get some traction in the "mainstream" media and even the Gov is starting to play CYA (see FDIC post). Blogs like this are instrumental in getting the word out. We are trying to educate the public and kill this thing before it gets so huge that it takes down the whole economy with it.

Sometimes I think we may be too late, though...

 
At 11:00 AM, Anonymous Anonymous said...

Dave F.

The Housing Bubble actually started slowly back in 1998/1999 base on your location.

By late 2002 it was a very serious problem and should have been put to a stop. I remember posting on all sorts of websites about the Real Estate bubble back then.
There was actually a website devoted to the housing bubble back in 2002 that fell into disuse by late 2003. When the bubble did not burst folks lost interest. Lets face it 2/3 years ago the interest only loans appeared and the boom was given new life.

I am afraid we are a good three years to late to prevent a major economic tragedy.
But we can help prevent the last potential suckers from getting burned and that is important.

 
At 11:10 AM, Blogger realist said...

i see that most markets have peaked and are starting to edge down. i'm even seeing prices of land edging down at the beach. the land prices have been way out in front of the finished unit prices. it will be interesting to see if there will be price reductions on units that are just entering the building pipeline.

 
At 11:50 AM, Anonymous Anonymous said...

price softening is evident now. A friend had his house for sale, and finally sold in 7 weeks with $5k price reduction (asking $540K). No more outrageous bidding among numerous parties. Sure sign of plateau, and downward trend to follow.

 
At 12:24 PM, Anonymous SactoBubbler said...

Here is Sacramento, the top is definitely in on the high-end stuff. I've mentioned before on this blog that a good friend of mine (a realtor) has been trying to sell her house for about 3 months now and has no offers, and interest has dried up in the last 3-4 weeks. Started out at 850K and is now 795K. She used to get 10 showings a week and now is lucky to get 2.

Here's the house:

http://realtor.com/FindHome/HomeListing.asp?snum=32&locallnk=yes&frm=bymap&mnbed=0&mnbath=0&mnprice=700000&mxprice=800000&js=off&pgnum=4&fid=so&mnsqft=&mls=xmls&areaid=2475&typ=1%2C+2%2C+3%2C+4%2C+5%2C+6%2C+7&poe=realtor&ct=El+Dorado+Hills&st=CA&sbint=&vtsort=&sid=04A5D6B7733EC&snumxlid=1045878981&lnksrc=00002

 
At 2:23 PM, Anonymous Anonymous said...

"Demand for liquidity will also drive an increasingly heavy flow of overseas money into top quality U.S. debt like asset-backed securities, said Jon Voigtman, managing director of principal finance at HSBC Securities USA."

Hmmm... top quality U.S. debt like asset-backed securities. Is Voigtman talking about the same assets that Americans are buying using IO loans, cash-out refi etc. and paying top dollars in bidding wars?

 
At 5:35 PM, Blogger TulipsAllOverAgain said...

The bubble which is directly related to liquidity and low borrowing costs will continue as long as there are investors at the end of the daisy chain to mop of the MBS. It will continue as long as MBS's represent an attractive investment, i.e., as long as they are paying a more attractive return vs. other investments and forms of savings adjusted for their risk. Now that interest rates are moving higher, the spread between the rates paid to MBS investors and what those same investors can alternatively invest in has narrowed a little more.

 
At 5:54 PM, Anonymous Anonymous said...

That is only true if people trust MBSs. When MBSs reach junk status and mortgage defaults are rampant, NOBODY will buy them, further exasperating the problem. Who can buy a house (at any price) without a mortgage, especially if they can't sell the house they are living in ?

 
At 6:05 PM, Anonymous Anonymous said...

It'll get tougher and tougher to get money from them when they know dollar will lose 40% of value to yuan. Besides, they know bubble when they see one, The only country that hasn't experienced the burst of RE bubble in the past 10 years is China, excluding Hong Kong that had 60+% decline. Australia is not too far away either.

 
At 6:47 PM, Blogger goleta said...

Based on an IMF research paper, China may have already reduced their US assets from 41% of their foreign reserve to 30%.

http://www.nber.org/books/ICF/prasad-wei2-22-05.pdf

" Under some strong assumptions, these numbers could be read as suggesting that, as of December 2004, about 30
percent of China’s foreign exchange reserves were held in U.S. treasury instruments, down from 41
percent in January 2003.27 But the caveat about inadequate coverage of the TIC data may be especially
relevant here."

 

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