A Time For Consistency As The Cycle Winds Down
Some Wall Street and Washington reports, starting with Paul Muolo. “At least five Wall Street firms are actively in the hunt to buy mortgage banking franchises, hoping to take advantage of profit-margin-challenged lenders that want to exit the business as the ‘cycle’ winds down.”
“A new report by Morgan Stanley suggests that the love affair between brokerage firms and mortgages may be short lived. The report notes that some stockbrokers likely will ‘experience frustration with cyclical, operational and regulatory frictions.’”
“We understand that loan ‘buybacks’ (whereby secondary market investors request that originators purchase back early payment defaults) continue to be a problem for many. One CEO of a small shop in Southern California told us he’s had six buyback requests so far this year compared to just three in 2004.”
“The OFHEO has directed Fannie Mae to suspend purchases of acquisition, development and construction loans until it fixes certain operational and control problems. In an interview with National Mortgage News last week, Fannie CEO Daniel Mudd said..he agreed that improvements are needed.”
The Washington Post. “Senior executives at Fannie Mae are heading for the exits two years into a $10.6 billion accounting scandal that has no end in sight. Since the end of 2004, 44 of the top 55 executive positions at Fannie Mae have changed hands, spokesman Brian Faith said.”
“At least 29 senior executives, including 15 who have left Fannie Mae, are under scrutiny for their possible roles in the accounting manipulation. Some may be forced to return bonus payments based on the faulty bookkeeping.”
“OFHEO found that CEO Mudd attended a 2003 meeting at which earnings management appeared to have been discussed and that he didn’t sufficiently look into an employee’s complaints about the company’s bookkeeping.”
And Stephen Roach at Newsweek. “We draw a false sense of comfort by thinking of economics as science. We risk an equally false sense of security by relying on central bankers who claim they can guide economies with mechanistic policy rules. Inflation targeting is one of those rules. It’s the rage in central-banking circles these days.”
“Newly appointed chairman Ben Bernanke was one of academia’s leading inflation targeters. Frederic Mishkin, a new Fed governor, is another luminary of this sect. They could well be a formidable team in pushing the Fed to adopt a price rule. This could be a big mistake.”
“On the communications front, (Bernake) has committed a number of flip-flops that have left financial markets in confusion. If this record is indicative of Bernanke’s communication skills, a shift to inflation targeting could backfire.”
“Inflation targeting ignores the elephant in the room—the excesses of the global liquidity cycle and the related profusion of asset bubbles that has surfaced since the late 1990s. A CPI-type price rule could compound the negligence of bubble-prone central banks.”
“America can’t afford to have the Fed slip up right now. With chairman Bernanke waffling, the relative credibility factor could swing away from the Fed. That could lead to a loss of confidence in dollar-based assets, with serious consequences.”
“On July 19, Bernanke will appear before the U.S. Congress to discuss the Fed’s policy strategy. This is a time for discipline and consistency. A dollar crisis would be a steep price to pay for the folly of inflation targeting.”
“On July 19, Bernanke will appear before the U.S. Congress to discuss the Fed’s policy strategy. This is a time for discipline and consistency. A dollar crisis would be a steep price to pay for the folly of inflation targeting.”
We’re already facing a dollar crisis.
Really? How come the dollar is riding so high, then?
Oh good. Then perhaps you’d like to do some deals by paying for gold, silver, copper, oil, kWHs, anything Canadian, etc. using your strong dollars?
We are in a dollar crisis, just because Captain Smith hasn’t gotten on the shipwide intercom to make the announcement doesn’t mean there aren’t aready all the free ice cubes you can carry up on deck.
Why would I want to purchase bubbleliciously overvalued commodities, right at the point when they are poised to crash? I would rather buy a McMansion — you can’t live in your speculative commodity investment, after all…
I’m more worried about the price of really essential commodities—coffee, sugar, and chocolate.
Well, chocolate (cocoa) crashed today, so maybe that Hershey’s bar will plummet in price!
http://tinyurl.com/zl7up
Commodities are pretty damn weird right now, but one thing is for sure: It is easier for the US gov to create dollars than gold.
Full disclosure: I panicked out of my gold position at $60 and haven’t bought back in yet. I think I may panic back in soon.
I know this is at the bottom of the page on the bit-bucket thread, but I was hoping some of the black belts might have an opinion here.
Why does it seem there are so many bubbles more or less at the same time? If you look around you can find some evidence of commentary on:
- Housing Asset Bubble (we all know about that)
- Credit Bubble (helped fuel the one above)
- Commodity Bubbles (not sure about this but I have seen it mentioned)
- Oil Bubble (very unpopular here, but I think it exists. I believe that oil prices are about 30% above fundamentals or more)
- Trade / Export Bubble (how China sees the west)
- Private Equity Bubble (Just read about this today at iTulip.com)
What is all of this? How can there be so many bubbles getting ready to blow all at the same time? How on earth can this be? Is most of this just people hyping to draw readers to their articles and web sites, or are we looking at a global economic calamity of previously un-witnessed scope?
Any comments or insights would be most welcome.
(also on the bit bucket thread, sorry)
You got it in the second one:
- Credit bubble
It fueled all of them. Low interest rates everywhere — the US has had to export created dollars to fund our debt and other countries have had to buy those dollars with their own created currencies to devalue said currency and keep their own people employed. A classic “race to the bottom”.
Game may be up soon, but who knows. But what has been destroying all these bubbles is interest rates.
That is what spooked me out of gold. I realized I was silly to be in it during a tightening cycle. I may re-enter after the next Fed meeting.
I’d say there are two reasons, the first is very low rates which made speculative borrowing inexpensive (and the carry trade fueled capital growth at financial firms). Second, asset prices also rose as percieved risk levels dropped. You can see this in everything from junk bond/treasury spreads or the record low levels of almost all option indicies. Investors just don’t percieve that much risk out there and are paying record high prices for assets in response.
Dollar crisis relative to what? Everyone uses the strong dollar of 2000-1 as a yardstick.
Euro parity was 1.18 in Jan 1999. That’s where we were a few months ago. At 1.25 we are not facing a crisis and every indication right now is for a dollar rally.
Personally, I buy Yen when the dollar shows strength……
The dollar is simply bouncing off the 30 year old “fixing” by the G-7..It held 1 more time.Getsucco that is a (b) low of wave 2 of intermediate trend. I think will trade well above 100 but stay below 120.
So this is bad for stocks.
The article quoted by Stephen Roach…I always thought he was a pretty good writer..but to LAY the blame on Ben Bernake after 25 years of Greenspan “never saw a bubble I didn’t like or want to stop “, is quite strange!
That is like Wall Street blaming the May top on the Isreali -Hesbola conflict.! Oh I forgot it was only last week’s drop that they blamed on this! It wouldn’t be that the false PPT conspirators are watching M3 disappear faster than they can sell paper in the money markets @ 5.3% (today)??
Flight to perceived safety - maybe true, or it could be central banks trying to maitain the dollar. see todays asian Times
“…Chinese Minister of Commerce Bo Xilai recently called demands for greater appreciation “groundless”. He denied that the exchange rate was being manipulated by the government and maintained that appreciation of the currency would make life even harder for the 210 million people still living on less than $1 a day in China but have only a limited impact on the Sino-US trade imbalance.
Bo attributed China’s trade surplus to global trade patterns and not specifically to the yuan-dollar exchange rate. “If the US doesn’t import from China,” Bo said, “‘it needs to import from other countries, even at higher prices, resulting in a bigger trade deficit.”
As expectations of further yuan appreciation rise, so too it seems does the perception gap between Chinese and Western leaders. For many in the West, it is an open-and-shut case: the undervaluation of the currency is unfair and unjustified, especially for a nation that is now a member of the World Trade Organization, and it must stop…”
http://tinyurl.com/mckfw
“Senior executives at Fannie Mae are heading for the exits two years into a $10.6 billion accounting scandal that has no end in sight.”
It sure makes one wonder how bad the news will be when this hidden scandal finally sees the full bright light of day.
What is shocking, is the fact that these executives are not being prosecuted now. How long does it take to find enough evidence of obvious fraud?
Are they strategically timing this scandal to come to light when the housing market officially tanks?
If I was a new shareholder I would be furious. The shareholders that have held shares for years are probably afraid to bite the hand that fed them, or they sold when the getting was good.
I think that’s exactly what they’re waiting for. If they tell the truth now, it would cause the housing crash to happen almost overnite.
The gov always takes the slow road.
The darned thing is that by postponing the bad news, they virtually guarantee that it will drop on the markets like a bomb shell after everyone already knows the housing market is toast.
Waiting in SD, you and every american taxpayer will soon be a shareholder. And according to S&P, you’ve been a shareholder all along.
I have been saying for a year, why aren’t these guys being prosecuted? It is a sham!
Makes you wonder how many of these politicians Raines and company own, lock stock and barrel.
Any bets on charges against Raines and Howard? These men walked away with millions. Enron looks like a kindergarden story to Fannie Mae.
The word is out, but the truth is in knowledge from the insurance industry.
When your regulator (as in the Fannie’s case) steps in to stop the bleeding,the Term is INSLOVENCY!
Regulators do not take control of a (public) company like this unless this is the case. The boards could not allow this..
But you say Fannie’s regulator is the FEDs (SO!)
GAAP and statutory realities are far different. Especially when the debts due are to Wall Street banksters. They have since probably fixed the losses and termed them for 20 years or so!
Fannie & Freddie saw 80% of their portfolio refinance when Greenspan hastily dropped rates to 1% for 18 months. The collateral damage, xx trillions in fixed mortgages are now 400 beeps underwater. The mathematicians never contemplated 1% their hedges that weren’t hedges BLEW UP! SO now Fannie can no longer do a brent crude trade and get the accontants to agree that it is “direct hedge” on interest rates (CPI) So the shorts had to be covered last year into the $70 top!
See this site for chronological details & speculations:
http://www.greatdepression2.com/pages/6/index.htm
Fannie is now a rich man’s mortgage backed closed fund!
““On the communications front, (Bernake) has committed a number of flip-flops that have left financial markets in confusion. If this record is indicative of Bernanke’s communication skills, a shift to inflation targeting could backfire.”
It is oh so chic to blame Ben. Most of the dollars issues are structural. There is only so much the Fed can do.
He is an easy scapegoat for armchair analysts. It is always much easier to be a critic than a performer.
He does have the job doesn’t he? And wouldn’t inflation targeting be a completely new policy if the Fed adopted it?
IMO what Roach is saying is that the dollar may crumple if the Fed waivers due to a mechanical tick over some arbitrary CPI line. Here is a picture of that strong dollar.
Apparently, confidence in the future strength of the dollar hit a roadblock soon after BB’s appt. ,and it hasn’t shown much life since. If the Fed caves to internal pressures and halts its interest rate rise, the dollar is poised to free-fall. ???
And here is another…
http://tinyurl.com/kldb4
P.S. Ben, I don’t have the crystal ball to tell me whether it is best to be in commodities or gold at the moment. But I think it is sure a great time to be long vega
GS,
I’m in the deflationist camp and have always hoped for a stronger dollar. What’s vega?
Vega is a measure of the sensitivity of options to volatility. If you own options, you are long vega.
Ben,
I agree that there will be deflation. When the economy is expanded by debt to prop it up, when the credit runs out, assets deflate. Even Greeenspan can come out and said what we’ve been doing is unsustainable. However, the central thinkers will try and fill the void/stop the deflation by injecting more credit/money. It has happened over and over. There is no policitian that will get elected by saying that a recession/deflation is a natural occurence to purge the inefficiencies…just hang tough through the bad times. They will get elected by promising people things they can’t possibly deliver without attempting to defy history. I agree. Deflation, which will be followed by massive inflation. Unless it really is different this time.
Deflation is a contraction of the money supply. That is virtually impossible in a fiat money system. Remember the “Helicopter Ben” lecture?
Sure, asset prices can fall but that does not mean that the money supply will contract.
“Deflation is a contraction of the money supply. That is virtually impossible in a fiat money system.”
Last I checked, Japan had a fiat money system.
The Fed has always had a malleable internal CPI target. Twin mandates of price stability and “full” employment would not allow easily a rigid external CPI target. With inflation targeting it seems the devil is in the implementation. If Bernanke wants to make the Fed less of a black box to the market that’s his call.
A succinct description of the Taylor Rule
From the Federal Reserve Bank of San Francisco
“Specifically, the rule states that the “real” short-term interest rate (that is, the interest rate adjusted for inflation) should be determined according to three factors: (1) where actual inflation is relative to the targeted level that the Fed wishes to achieve, (2) how far economic activity is above or below its “full employment” level, and (3) what the level of the short-term interest rate is that would be consistent with full employment. The rule “recommends” a relatively high interest rate (that is, a “tight” monetary policy) when inflation is above its target or when the economy is above its full employment level, and a relatively low interest rate (”easy” monetary policy) in the opposite situations. Sometimes these goals are in conflict: for example, inflation may be above its target when the economy is below full employment. In such situations, the rule provides guidance to policy makers on how to balance these competing considerations in setting an appropriate level for the interest rate.”
http://tinyurl.com/mwobc
‘The rule “recommends” a relatively high interest rate (that is, a “tight” monetary policy) when inflation is above its target or when the economy is above its full employment level…’
inflation above its target level — CHECK
economy above its full employment level — CHECK
Sounds like the measured series of rate increases may have a bit longer to play out…
“economy above its full employment level — CHECK”
What is “full” employment these days?
I think, when I was in college, “frictional unemployment” was pegged at 3.7% or something close.
Meaning “full employment”. I believe there have been adjustments made, and the real rate of unemployment is closer to 10%. Depends on the source.
“And wouldn’t inflation targeting be a completely new policy if the Fed adopted it?”
In the US, yes. In the rest of the world, no.
http://www.federalreserve.gov/Boarddocs/speeches/2005/20050526/default.htm
I think that the wild overreactions of the market to offhand remarks by Ben in his first months of tenure show that his intention of clearer communications is a pipe-dream. I suspect that Alan’s oracular style was probably a learned response to the fact that the market is primed to overreact to ANY hints of future intrest rates. Ben seems to be learning that lesson quickly.
“Newly appointed chairman Ben Bernanke was one of academia’s leading inflation targeters.”
He is undergoing the typical education process of an academic economist turned government policymaker. Much of what academic economists theorize in the classroom stands no chance of succeding when confronted with the harsh realities of real-world economic and political constraints.
A related queston that goes back to the ARM conversation…I found this little blurb and don’t really understand what the gist of the entire thing means, but found this line to be quite informative, if I can take it at face value.
“Rate/Term and cash-out refinance loans account for 12.54% and 14.31% of the pool, respectively. The states with the largest concentrations are California (25.78%), Virginia (10.95%), Washington (9.53%), and Maryland (8.67%). All other states represent less than 5% of the pool as of the cut-off date.”
The link is here http://tinyurl.com/re9c7
Is that saying that of all the mortgages that company holds, that X% were cash-out refi’s? People were asking about specifics regarding loans, and this jumped out, but I’m not sure how to interpret it. Thanks!
Nikki
Mortgage banks, lenders, and Wall Street investment firms package together bundles of home loans all the time. They’re called mortgage-backed securities (MBS for short). Those pools of loans are rated by agencies like Fitch. You can buy different tranches or classes of these MBS depending on your risk tolerance and the yield you’re shooting for as an investor.
In this case, the stats you’re looking at are just the characteristics of the underlying loans in this MBS. Fitch is saying that this particular $160-ish million pool of loans is made up of 12.5% “pure refi” mortgages (mortgages where the borrower just wanted to lower his rate or change his term, like go from a 30 to a 15 year fixed). Another 14.3% of the pool is “cash out refi” loans, where the borrower converted equity into cash through the refinance transaction.
Cash outs are riskier than rate/term refis, from an MBS investor standpoint. A higher proportion of loans in CA (considered a high-risk state due to exceedingly high home prices, off-the-charts debt-to-income ratios, etc.) is also generally perceived as riskier.
Does this help?
Absolutely, thanks for the “MBS’s for dummies”! Is there a place where we can find out how many mortgages in many pools (like all of them
were of a particular type? I ask b/c I can remember reading that over 50% of first time home buyers used ARMs in MD in 2005, but cannot find a source for the data. Is that something that’s pay to play?
You could dig it up, from the pool offerings, but it would be slow and expensive to do so. If you can find access on a Bloomberg it would speed your search, but you’d still be talking a good couple hours or days. There are a crap ton of mortgage pools out there. The enterprises disclose some statistics, but you probably have to depend on what they tell you. That wouldn’t be everything because some mortgages are kept by the originator (or packager) as whole loans and the features of those aren’t publicly reported to my knowledge.
Scour their press releases and reports and you might find some summary data on both.
There’s an industry tracking firm I’ve seen quoted in news articles called Loan Performace. They’re in San Francisco, if memory serves, and their website is loanperformance.com. But I don’t think their info. is public — it’s generally sold to lenders for research purposes (and they probably provide data to outlets like the New York Times because of the publicity). They’re the ones who supply data like “%-age of loans to investors vs. primary owners in (name the city).”
Mortgage Bankers Association (mbaa.org) also does research on what %-age of the market is made up of various types of loans. But as far as an aggregate stat on what percentage of the mortgages pooled nationwide are I/O, neg-am, etc., I don’t think I’ve seen that anywhere.
‘We understand that loan ‘buybacks’ (whereby secondary market investors request that originators purchase back early payment defaults) continue to be a problem for many. One CEO of a small shop in Southern California told us he’s had six buyback requests so far this year compared to just three in 2004.’
If this trend accelerates, it won’t matter what any CB does.
Ben,
Well, this thread is probably too “stale” to get a response, what would a typical “buyback” request rate be? 0.1% of mortgages? And how far out can secondary market investors demand a buyback?
To extend on your comment: “If this trend accelerates, it won’t matter what any CB does.”
I agree. Add to this S&P redoing MBS bond ratings and a lower attractiveness for these bonds… We’ll see a much greater tightening of the HELOC and re-fi market than could be created by any central bank. This will create a much faster response than the 1991-1995 recession.
Neil
I’ve never seen buy-back details online and would guess it varies from deal to deal. If the secondary markets get nervous, the housing bubble could collapse quickly.
That is super-instructive - thanks.
The buyback rate depends on the originator. If a shop acts as a pure mortgage broker, meaning the lender they sell the mortgage to makes the ultimate decision on a file, then as long as there isn’t fraud involved, the rate would be extremely low. However, if a shop acts as a correspondent or direct lender, approve the file themselves and then sell the loan to a mortgage lender, the buyback term can be anywhere from 6 months to 2 years.
I used to work for a direct lender and I hate to admit it but I approved some loans that had to be bought back(fortunately there were only two and the balances were very small, still didn’t make my bosses very happy). These loans were audited and we had to buy them back even though they performed well. They didn’t meet their credit standards. These loans were about 6-12 months old. Typically, one out of ten files we originated were reviewed by the GSE’s. If they passed review, we didn’t have to buy them back. If a loan goes into foreclosure with a GFE, a file review is performed, and it is determined that the loan didn’t meet their guidelines, then you have to buy back the loans. Typically, this means the information collected didn’t jive with what was sent through the GSE’s automated underwriting systems.
The biggest fear are these fly by night subprime correspondent lenders who approve and close in their own name. They don’t have automated underwriting systems to validate their files. They can often “hide” loans that don’t meet underwriting criterea. They can bundle these loans with other loans that do meet standards then hope they don’t get flagged for review. I would assume only 5-10% get audited, maybe less. There were so many loans originated the last few years that mortgage buyers didn’t have the staff available to review enough files to get a real idea about loan quality.
If you have first payment defaults, that is pretty much an automatic buyback. There will be a lot of mortgage companies that could go under if there are too many loans deemed unacceptable if they go into foreclosure anytime soon.
one overlooked fact is that many of your national wholesale lenders are acting as “master brokers”, meaning that they are underwriting and closing loans from brokers under the terms of firms of investors like credit suisse first boston, indy mac, aurora loan servicing, wamu. what’s been happening lately is these end investors are tweaking the buying criteria, leaving the wholesalers holding the bag, regardless of payment default and fraud. expect this to be the undoing of quite a few lenders, as the “new” price of their unsalable paper is gonna sink the ship.
Very interesting.
I’m going to have to find out more about this aspect of the housing loan market.
My girlfriend *used* to do morgage backed securities, so I admit to asking her a few questions too. (But note: she wasn’t involved with “buybacks” in any way.)
My oh my… another way the housing “house of cards” could fall down… Interesting. All of this will (is?) have(ing) an inpact on the sales rate. (now? Soon?)
Thanks for the info everyone!
Neil
subsonic22, this is a wonderful post. Those of us outside the industry know only that mortgages are being pooled into securities and sold. The mechanics of the process — and so the ways in which it may be flawed — are completely invisible to us.
Thanks Subsonic22. Obviously you know the insides of the mortgage business, and reading about how mortgages get packaged and passed around is quite interesting. I had to read your post several times before I understood it. Called “pass the hot potato”, or something like that.
Who are some of these sub-prime fly by night operators? Sounds like what they are doing is fraudlent to the people buying the packaged mortgages. Are any of them publicly traded?
Keep us posted!
Ben:
I think that this is THE most important aspect of this post.
What happens when the originating firm is out of business, who gets to buy it back?
We have already had 2-3 sub-prime mtg shops close their doors in OC.
That will really accelerate things.
I’m still amazed how much the price of gold fell today, and how stable the overall stock market was, given the events of this weekend.
Flight to the still presumed ’safe harbor’?
The dollar is enjoying the safe haven status of the Bush administration’s stealth domestic security procedures. You will notice there have been no domestic terrorist incidences since 9/11/01.
If you mean no large scale attacks, you’re right. And that is a great thing; but let’s not forget that Muslims are still trying to strike in the USA, and the best ones may still be concealed. The Mexican border is wide open, and we know the terror leaders know about it. Thousands of Muslims from terror-states are caught crossing each year.
If you mean small scale, there have been at least two, possibly three. The Muslim gun attack on July 4 2002 of the El-Al airline counter at LAX. The Muslim in an SUV who ran over students at a university in the past 6 or 9 months. And the bomb that exploded at an Oklahoma college football game, also linked to Muslims.
A number of organized Muslim attacks have been caught. The Black guys in Florida in the past 30 days. The missile buyer in the NJ/NYC area. The Black Muslims who planned to attack an army base and/or recruiting stations in the L.A. area. The Muslim leaders in Lodi who were charged and/or deported for lying about their training at terror camps in Pakistan. And many more we haven’t heard about.
Oh, I forgot about the grand-daddy of them all:
John Malvo and his man Muhammad. The Washington DC terror snipers are Black Muslims. Malvo’s little sketch book made it pretty clear they were killing infidels. That’s 12 or 13 dead, isn’t it?
“If you mean small scale, there have been at least two, possibly three. The Retiree car attack on July 16, 2003 of the farmers market at Santa Monica. The Retiree in a station wagon who ran over people at a Connecticut festival in the past 6 or 9 months. And the social security account that exploded, also linked to Retirees.”
Hey, don’t forget that John Allen Muhammad was in the US Army, and was a veteran of the Gulf War.
Wait a second. Timothy McVeigh, Oklahoma city bomber, was in the US Army, and was a veteran of the Gulf War.
HOLY CRAP: we need to immediately deport all US Army veterans!!!!!!!!111!!!!one!!!!
Bush sux rox. He has wasted all the money.
I suppose if there is a large attack then you will blame Bush. Yeah, right. Stay outta politics you’re not very good at it.
I thought I was discussing economics. But thanks for your insights
Remind me again who was president on 9/11? Oh, but he is doing much better now. Pulleeze!
Speaking of Bush, this is kinda funny.
Bush’s Earthy Remarks on Mideast
http://tinyurl.com/h2nrw
Oh well, at least he did not repeat Ronnie Reagan’s “open mike night” remarks about all-out nuclear war…
lol
The general public seems to think these events are isolated minor skirmishes when the reality is a muslim WWIII. And now back to American Idol……….
“I’m still amazed how much the price of gold fell today, and how stable the overall stock market was, given the events of this weekend.”
All markets are on pins and needles. Gold may well be the place to be but for a “safe haven” it is extremely volatile.
But oil, which is unidirectional and I have a hard time seeing how it can go much lower, even if Iran stops enriching this minute and everyone lays down their arms. Even if there is no peak oil, there is the perception of such, and any little sneeze from anything will send oil up regardless of fundamentals and inventories. I am truly curious as to why oil is not seen as a “flight to safety” in this current world climate, as is gold. Oil is one of the havens of choice for Eric Janszen over at itulip, and I tend to agree with his assessments. Thoughts? Thanks!
Nikki
Sure:
There exists the possibility that a U.S. recession could negatively impact Japanese and Chinese economies (and others, of course - but these would be the obvious biggies) - with a subsequent reduction in demand for energy. Can’t say with any certainty what will happen - but I doubt any oil-lovers could prove that the possibility does not exist.
BTW, what is unidirectional? It sounds like someone is saying that it “never goes down.”
Well, recently it has only gone up, so that’s unidirectional, at least for the last three years! Of course the price of oil will drop at some point, but I don’t see it happening in any significant fashion any time in the next 3 years, I guess. Just my opinion. And I think “reduction in energy demand” in the US is a total impossibility in any meaningful manner. There would have to be a recession boardering on a depression to significantly reduce demand here as well as in China. I can see China busting before the US due to their insane growth rates (11.5% in Q1 2006!) but with current geopolicical tensions used as a prop for price levels despite growing inventories, it has to be a “perfect storm” for evergy prices to fall.
Sorry, that should be 11.3% in Q2 2006.Totally unsustainable…
there will be a huge number of loan buybacks in california…..almost half of the loans made in the bay area last year were stated income loans,when it should be about 5%.they are called liars loans for a reason,and when they default,the 4506 goes to the IRS,the income on the loan app does not come close to matching what was reported to the IRS….and the contract says you must buyback if there is fraud.this can get expensive in a hurry considering how common100% financing is,and the high dollar amount of each loan.i expect a slew of mortgage company insolvencies,and wonder how the fraud involved will affect their bankruptcies,and the individual liabilities of the company officers…another fine mess.
Fascinating! Does a mismatch between stated income and reported income constitute fraud or is it simply the basis for an investigation of fraud?
yes it is fraud,either it is tax fraud because you failed to report income to the irs,or it is mortgage fraud,where you lied about your income to get the loan.a fraudulent application usually triggers an automatic buyback provision between broker and lender.an experienced underwriter at a mortgage bank told me that at least 40% of the stated income loans they approved contained significant fraud,and they had some of the tightest standards in this area.it is a big problem.
Either it is tax fraud OR it is mortgage fraud. That’s my point. If I underreport income to the IRS then that’s an issue between me and them but it wouldn’t be mortgage fraud and I can’t see why it would trigger a buyback provision. To make a determination would require an investigation. Naturally, given the choice between saying one has lied to a mortgage company vs: saying one has lied to the IRS, well, I know which way I’d go!
It’s probably easier to lie to the mortgage company than to the IRS, especially when the mortgage agent is complicit. I’m willing to bet that most of the disparity will turn out to be fraudlently inflated income, not tax evasion.
What is it with those Freddie Mac TV commercials? How they (FNM) are making it easy for the little people to make their “nest eggs” and IT’S WORKING (it looks as if they’re being defensive by asserting the “and it’s working” line), blah blah blah.
It is a signal to watch out for some major scandal and/or tankage?
I love it when one of those commercials goes back to back with one from the NAR - lately emphasizing how very, very ethical REALTORs are, but only if they are a member of the NATIONAL ASSOCIATION OF REALTORs. I’m seeing a lot more of these in the last few days.
This is worth watching:
http://raymondjames.com/experts/puryear.htm
an excerpt:
Bear market or not, we think when the Israeli/Lebanon conflict is resolved the markets’ focus will revert to the problems evident before the “Israeli war.” The most troubling of those problems, in our opinion, is what is occurring in the real estate markets and the concurrent negative “wealth effect.” Indeed, according to Raymond James’ real estate team, $2.7 trillion worth of adjustable rate mortgages will reset at higher interest rates over the next few years, depressing disposable incomes. They further noted in their recent real estate report:
“Examining the fundamental environment for housing, the current situation appears somewhat more tenuous, in our view, than some observers may realize, particularly when compared to the cycle of the late 1980s. The primary driver of housing is affordability, in our view, and from that standpoint we are facing lower levels today than at the peak of the late 1980s cycle, in spite of the fact that mortgage rates remain some 300+ basis points lower today. Additionally, during the late 1980s, affordability trends were more favorable, meaning that affordability was improving following an extended period of unaffordable conditions during the late 1970s and early 1980s, whereas today conditions are deteriorating following an unprecedented period of very high levels of affordability.”
They go on to state:
“From an inventory perspective, today also appears more challenging than during the late 1980s based on absolute levels of inventory (565,000 today vs. 358,000) as well as months’ supply (5.8 months today vs. 5.0 months). Some pundits have prophesized that inventory levels should moderate, based on many investor cancellations having already been dealt with; thus, cancellation rates should slow in the back half. While we do not disagree with the thesis that investor cancellations may be moderating, we believe that, based on discussions with our contacts, most cancellations today are legitimate buyers who are walking away from earnest money deposits out of fear of declines in home prices. Furthermore, we expect inventory levels to build even further in the back half.”
“Another aspect of inventory that we consider is the “hidden inventory” that we have written about extensively. This is inventory that is not currently captured in the traditional singlefamily inventory data because these are homes that are for rent, and show up in the rental stock data. Over the past several years, single-family vacancy rates have spiked, we believe as a result of a surge in investment by individuals in single-family real estate. In summary, given the high inventory levels in the various supply channels, there are more vacant houses in the U.S. today than at any time in history. We estimate that there are currently six million vacant housing units comprised of vacant for sale units, vacant rental units (including condos, duplexes, and apartments), and unsold homes in the new construction pipeline. We believe selling these inventory levels down to more normalized levels will take two to four years, similar in timeframe to the 1987-1991 housing correction.”
So 1% can afford a home…. wow, lotsa 1%’ers out there buying up everything…lol
Knowingly making false or misleading statements on a mortgage application is a federal crime. This includes stating the home is your primary residence, lying about your income, etc.
Good luck floppers!
It also renders the debt nondischargeable in bankruptcy.
I was wondering about that. Do you think that they will ever enforce the law?
They can’t even enforce the tax code, where will they get the manpower to prosecute liar loans ? The Credit Industry may get left holding the bag on this one unless they are willing to foot the bill or settle for pennies on dollars.
they will sell pools of bad recourse loans just like they sell pools of bad visa accounts,usually for 3 to 5 cents on the dollar,the ones with fraudulent apps will be a better buy,since they can’t go bk…oh it also turn a non recourse purchase money loan into a recourse loan here in california…..otherwise people would profit from the fraud…..a bad bad thing unless they are important folks.
Inflation targeting is a long story. It was actually a debate during the days of Reagan when he was deciding to go with Greenspan (Greenspan is against inflation targeting).
Here is the way to look at it. When you go to bed at night with a dollar (using the term “dollar” generally) under your pillow, can you imagine waking up the next morning with that same dollar actually being worth MORE???? Well why should it not? If productivity is increasing through technology etc, the benefits of which would be seen through increased purchasing power of this dollar bill.
BUT, since the dollar is diluted every day by continuous printing (i.e. inflation) the purchase power of that dollar decreases as you sleep at night. (note: inflation is not an increase in prices- Increase in prices is simply a symptom of more dollars chasing the same amount of objects).
Back to inflation targeting. What this actually means is the FED is saying “Well we will dilute the dollars by this much (pick a percentage”……they are not even putting on the mask of protecting the purchase power of dollar. They want to target a percentage of dilution!! Confiscation of saved wealth as you sleep!
So not only is the FED acknowledging that it will be diluting the dollar (a “dilution target” one could say), through this they not only wipe out any productivity gains (which should be a windfall for the American people through increased dollar purchasing power), they are coming in your bedroom at night and leaving 98 cents for that 1.00 you left under your pillow the night before.
It is a stealth tax pure and simple, the benefactors of which are the 1 stage money issuers: Banks. In all inflation events, the first holders of the currency see the most benefit- Banks.
wrote this on a whim…..might have some gaps.
Hopefully inflation is not running at 2% a night
Gentle Ben B may not be so gentle with JUST 2%….:)
What a bunch of dirtbag criminals. The sheeple don’t even realize when they are coming right out and saying “This is how much we are going to take from you” Just wrap up your motives in words with more than 2 syllables and the public will never realize what is going on……
Perhaps if the FED issued a statement like “We gonna jack you 3% yo papers dis year foo” there might be an outcry.
That is exactly right. And we sheeple are so brainwashed about it that we are trained to be **scared** of the fact that increased productivity, trade, etc., might actually produce a general reduction in prices.
The dreaded deflation!!!! Oh no, God forbid consumers might enjoy cheaper goods and services from one year to the next!!! The Fed has to save us by coming along and allowing banks to print not only enough money to wipe out those reduced prices resulting from productivity gains, but also another 1% or 2% on top of that, to actually cause a price increase.
And people actually thank the Fed for this.
About six months ago, I never would have understood what you all (and myself) were writing about. But I’ve been reading up on this, and now I do.
What a scam, once you study the economics of it.
Another thing- The founding fathers KNEW this would happen. They knew of the Rothschilds. They knew money would be debased and diluted.
“I believe that banking institutions are more dangerous to our liberties than standing armies. Already they
have raised up a moneyed aristocracy that has set
the Government at defiance. The issuing power should
be taken from the banks and restored to the people to
whom it properly belongs.
If the American people ever allow private banks to
control the issue of their money, first by inflation
and then by deflation, the banks and corporations
that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.”
-Thomas Jefferson
“Give me control of a nation’s money and I care not who makes her laws.” Meyer Rothschild
L-train,
But, you HAVEN’T studied the economics of it, it appears. I’ve posted below, already, but I’ll pose some simple questions for you:
Would you buy a car today if you KNEW it would be cheaper tomorrow? (not necessarily a “no” - but more likely to wait)
Would you borrow a half million today, knowing that you not only have to pay back the principal and interest - but also have to fight the deflation beast along the way? (Think: my mother’s $650/month mortgage payments seem like pocket change today compared to 25 years ago. What if the situation were reversed? Oops, no more mortgage loans)
Ain’t nothing wrong with (controlled) inflation. And, no, the guvment ain’t trying to rob you blind. People’s salaries rise roughly in step. Just stay ahead of it and you’re fine.
“”Ain’t nothing wrong with (controlled) inflation. And, no, the guvment ain’t trying to rob you blind. People’s salaries rise roughly in step. Just stay ahead of it and you’re fine.”"
Doesnt look like real wages have kept up to me….”roughly” must be a techincal term
http://www.bopnews.com/archives/real_long.gif
A few thoughts.
Initially, I’ll say that it is extremely important to precisely define what one thinks of as “inflation” or “deflation”. I view inflation as an increase in the money supply. “Rising prices” is not inflation — it is rather, a long-term symptom of inflation. Likewise, deflation is not merely falling prices generally,but a contraction of the money supply.
As to your first argument: people buy goods all the time knowing they will be cheaper next year. No one would ever buy a cell phone or computer were it not otherwise. It also depends upon the magnitude of the price direction– if you’re toilet is broken, would you hold off buying a new bolt for it because the bolt at the hardware store will be 2% cheaper by next year? Would you always stay home and become a hermit, year after year, simply because your plane ticket to Hawaii might be 4% cheaper next year? Also, you fail to consider that lower prices means more people can buy those goods, thus increasing, rather than decreasing, the sales volume of certain goods.
Second, it’s already been discussed below about your loan analogy - investment need not come from borrowing. The conclusion that you assume in your example is that you should be borrowing that money in the first place. But I view that it is better to let a free market, rather than Alan Greenspan, determine whether a loan is a good one or not.
I agree that it would suck to be borrowing admist deflation, defined as a contraction in the money supply. But if we didn’t have the Fed allowing creation of money in thin air, we wouldn’t ever see that problem (and, given our debt, we won’t ever see a decrease in the money supply ever again. There is too much pressure on the system to erode the value of debt), because we would have a stable money supply — money that has a real value.
Third, I agree generally that wages keep up with inflation. That is because when new money is added to circulation (via bank loans), that money will, over time, make its way into the generally economy and thus raise prices and incomes. We talk on this blog about people taking out HELOCs and buying cars, taking trips, etc. This is how that money gets into the economy and generally raises prices and wages.
I don’t see this phenomena being bad per se. What is bad it that this whole process creates boom and bust cycles that are more sweeping and painful than if the market set the cost of all borrowing, rather than the Fed indirectly controlling the creation of new money through loans.
Fourth, your argument that there would be no more mortgage loans is unsupported and very weak. Interest rates are set because investors want a return on their investment, which means they want to get a return that matchs inflation plus some, that “plus some” is compensation for tying up their capital by giving it to you, and taking the risk of non-payment, as opposed to putting that capital to some other productive use. This is easy to see in practice, and is why rate for the 30-year fixed, etc., generally track inflation expectations more closely than any other measure.
Without the government creating money out of nothing, there certainly still would be loans, but their interest rate would also be much lower, because the loaner would not then have to worry about making sure the rate of return is about the same or higher than the government’s rate of creation of money. Without the Fed, mortgages would indeed exist, and they would be remarkably more stable. The interest rate would be set at the real rate of return, rather than the real rate of return + expected annual inflation over the period of the loan.
“Here is the way to look at it.”
Respectfully, no. What you should have said was:
“Here is A way to look at it.”
While your post was very clear and logical - and I do not disagree with the jist - there were some “gaps.”
Try this: (and this applies to most of the subsequent posts)
Have you thought of what would happen to ANY economy if the real future value of debts (taken on by persons or businesses) were to become LARGER TOMORROW THAN IT IS TODAY??? Nobody would borrow money. Inflation erodes debt (duh), and thus acts as a tailwind for an economy (when predictable/stable and moderate). I presume that THIS is why a central banker would consider it.
Deflation is a deal-breaker. Very hard to undo once it sets in - just ask Japan.
We Rent-
Lets keep it simple. You are playing a game of monopoly. You buy some properties…charge some rents…etc…..moving right along……
The player who is the “banker” either slowly or with one big event starts injecting more and more money into the game….(a simple answer as to how he might do this would be fractional reserve banking- which is what we have in the US…. he loans out money to other players (charging interest) and only has a fraction of the assets that me loans out….say 10:1. Dont forget- he is the Banker…who is going to challenge him? You?
Now what does that do to the properties you owned and charged rent on? Do you gain anything from the monetary injection? Do you lose anything? Your answer to this question will make it clear to me if you know what you are talking about.
In your post to L-Train hints to your overall misunderstanding. Investment does not HAVE to come from borrowed money. Ever heard of savings? Yes, beleive it or not that is what happens in a healthy economy, things are bought or invested in by the use of savings. Of which the US has none (negative even).
Your point with Japan is even more misdirected. Japan has had a decrease in prices (mistaken as “deflation”)….but if you look at the M3 of Japan (with the exception of about 3 month period) it has never stopped increasing!! Depending on your use of the term inflation/deflation (I am using Austrian definitions). First and foremost inflation/deflation is a monetary phenom. Period.
I understand what you are saying- but the problem is that it is the First person that holds an inflated (diluted) dollar that sees the greatest benefit……it is the low man on the totempole that gets stuck with the worthless dollar. (see reference- all of history)
With regard to your “Try this”…. If the debt you took on yesterday has become “larger” as you say….what has happened to your savings? Are not those dolalrs more valuable? Are saver not rewarded through increased productivity?
Who shall be rewarded Debtors or Savers?
Are you saying the economy needs inflation to run? Come on.
Wow, you should be a central banker. Then we could really screw things up.
Approximately the answer I was expecting.
“Investment does not HAVE to come from borrowed money. Ever heard of savings? Yes, beleive it or not that is what happens in a healthy economy, things are bought or invested in by the use of savings. Of which the US has none (negative even).”
-Is this last line not an important factor? Don’t get me wrong - I’d love for my cash to become stronger and stronger sitting under my pillow - but you’d trash the economy rooting for deflation. Maybe YOU’D come out okay, but YOU are not what is important (Were you aware of that?). You guys sound like conspiracy theorists - that the man has perfected some scheme to hold the common fella down.
Things cost more (dollars) today when compared to 20 years ago. You know what? Incomes are not what they were 20 years ago. I stick with my point - you stay ahead of inflation, you come out okay. No need to complain if you know what you’re doing, which it sounds like you do.
By the way, the question you wished answered? That’s covered in the Idiot’s Guide to Economics, as well as the Idiot’s Guide to the Federal Reserve. Don’t prance around as if you are teaching someone something they can’t learn sitting at Borders. It’s not couth.
Why should you, I or anyone be required to “stay ahead” of inflation in order to be OK????? Who and why is putting this requirement on us????
Your not backing anything up.
Your line of reasoning is not leading anywhere. What are you in favor of? Stand for?
Seems like your just anti-LM.
Where am I prancing?
People around here know me as a stickler for grammar. Not typos - grammar. I’m telling you, gosh, it’s just so hard to take seriously a person who CANNOT get the “Your” vs. ‘You’re” thing down. You ARE demonstrating YOUR abilities just fine. No more lectures necessary. Message received - loud and clear.
Approximately the lack of BASIC understanding of the English language I was expecting. Keep them coming, though. People notice.
We can write in my mother tongue if you prefer…oder geht das nicht?
> Depending on your use of the term inflation/deflation (I am using Austrian definitions). First and foremost inflation/deflation is a monetary phenom. Period.
You can write another period, and I still disagree with you. Japan experienced price deflation after the housing bust, regardless of how you define the money supply. The disability of the Japanese Central Bank to make borrowing easier in deflation should tell you also why a small but predictable amount of price inflation is desirable: For an investor in such times borrowing would make economic sense only, if the rates would be negative, which is impossible, because people put their savings rather under mattresses and out of circulation, reducing the money supply further. This was the experience of the Great Depression. The Austrians seem like a sect: the more insulated they got in the economic discussion, the louder they spoke about their righteousness (no offense intended for the actual Austrians in Europe).
Relative strictly to my own education, this has been the most useful thread of the past 7-10 days.
We all are earning a phd here at Ben U.
In any event- “Money” whether is be gold, silver, Federal Reserve Notes, tabacco, sea shells…….ALL money represents a store of value used in transaction…….
Basic physics….the more “money things used as storage of value” that are created…the more value that is sucked out of all prior “money things”. Nothing can change this.
the Fed is less concerned about inflation than deflation. I think the FED wants to get the interest rates up so they have headroom to fight deflation should it threaten again. The FED lowered rates quite a bit to save the economy from preceived deflation and caused the housing bubble. Will the FED lower rates again to save this same bubble from deflating? I think it depends how bad it gets. Right now the FED is tring to stop inflation from going up above 3%. I beleive that is what they will continue to do and if a few borrowers go under too bad. I believe quite a few large lenders would be unhappy if the FED decided to inflate away debt, especially since the US is a very big debtor. haha what a joke if the FED causes runaway inflation so its big debt is not so big, too bad China and other buyers of US debt. Anyway the Bond market yield curve is inverted so at least these bond buyers don’t believe inflation will get out of hand. Why else would a 10 year treasury be the same price as a 6 month? I’m betting on a recession one year from now.
Then probably lower interest rates. Not as low as 1% though!
There’s another way to add inflation to the economy and at first thought it sounds rather bizzare:
The high price of oil is short term inflationary but long term deflationary (in most things except basic needs). Low oil cost is actually inflationary long term (~30% of a manufactured good is realted to energy cost -manufacturing, transportation,etc). People have more money to buy stuff instead of gas and corporations see increased revenue (and earnings) due to lower maufacturing costs.
One way the US can inject liquidity into the system is by oil crashing. It’s what happened after the last war in Iraq (1991) and post-1991 housing bubble bust and it’s my opinion that this is what lead to the stock market run of 1994-2000.
can we achieve this by immediately charging an excise tax of $2.00 per gallon of retail gasoline? we can offset it with income tax cuts.
Or, we can raise income taxes on the top 2% and lower gas taxes! Far better.
Wow what a great thread -my head is spinning! One issue I have with economic/investing musings is that nagging question that never seems to get answered: If we’re all in it for the short-term, to simply “keep ahead” of it instead understand the damage being done and take steps to repair it, what exactly do we wind up with when the smoke clears? So we own the only shiny new house in the othewise smoldering and ruined neighborhood? Yay!
My worry is that this time, the powers that be have crapped way too much where they and all of us eat. If we let the ruthless and short-term thinkers rule the day, this is what we get.
Well in a free market if all people are in it to stay ahead as you say that means money will go to the best possible use. The futures market is a good example of short term traders benefitting
everyone by keeping a stable price for commodities.
I think the free market will work this housing bubble out and the biggest danger maybe FED manipulation of money supply to try and tweak the free market causing other imbalances. Maybe that is what you mean by “powers that be”? I think damage has to be done, in other words and the FED has to let it happen. I think the FED bailed out big bussiness by really low interest rates. Then regular fokes figured ” I’m not going to save, interest rates are below inflation, II will borrow cheap and make money” causing a housing bubble.
besides I don’t think it will be as bad as some claim, it will be plenty bad for some but in the end it will be better for most. I think after this many will start saving real money again.
I’m not a huge fed fan, but I’m the absolute sworn enemy of the loan pimps who have been allowed (no wait, encouraged) to push credit and mortgages onto people who have no business getting either– all in the name of stuffing their short-term pockets. Flushing lending standards down the toilet in the name of greed is the prime cause of this runup, not the fed’s tweaking of rates.
The trick is not to allow our ‘free’ markets to become free-for-alls for the most kleptocratic and ruthless, leaving all of us, in the end, with a mighty big mess to clean up (that is if we can clean it up this time).
Those that can save, will, but those that can’t are going to become an angry, disinfrancised debtor class — and you can bet they will affect your quality of life one way or another, no matter how strong the gate is on your gated community.
I see your point…loan pimps, yes on the radio as bad as car salesmen. In Cali on AM KNX1070 I used to hear them all the time telling me I was a fool for having a fixed rate mortgage. Something about I gambled and lost because of all the money I would have saved with an adjustable. mark tisen I think the hawkers names was?
I bet the disinfrancised debtor class will do what its always done, walk away. I think its fairly easy if you make below a certain wage.
Lets hope the loan originators get there loans back when they default. haha.
I left Cali because of the gated community on one side and the poor barrio on the other side… as you say its not very stable is it?
I have read that its japanese free money that caused this bubble not really the us FED? I have no idea if this is accurate?