November 24, 2007

Is The Jig Up For Mortgage Securitisation?

Readers suggested the future of mortgage securitization for a weekend topic. “I suggest a weekend thread on housing bust litigation. Some examples of which I am aware include: 1) NY state Attorney General subpoenas of Fannie and Freddie, plus related investigation of WaMu and outfit that does its appraisals; 2) Class action suit against CFC; 3) Other?”

“I am also curious about what other litigation might ensue going forward; for instance, what about investment banks that paid out record bonuses last year, but are now reporting ‘larger than expected’ subprime writedowns in the $3bn+ range? And what are the broader implications of a possible wave of litigation for the future of Wall Street’s vaunted asset securitisation business model?”

One poster was sarcastic. “CEO Mozilo did deposit his stock sale Dollars $$$$$$$$$$$$$$$$ directly into his ‘personal’ money market account with Countrywide ‘Bank’ right? I mean, that would really be the thing to do to show all the ‘other’ depositors that everything is goin’ be alright…down the road.”

One was philosophical.”Success has a hundred authors; failure, a thousand lawyers.”

One points to the raters. “IMHO, none of this could have happened if the ratings agencies were doing (what investors assumed was) their job — appropriately identifying risk characteristics of various securities.”

The Australian. “Jig could be up for asset-to-security converting. An Australian at the forefront of the Wall Street securitisation industry has warned that the business of converting assets such as home loans into marketable securities will be ’seriously challenged’ as regulators and financial markets seek remedies for the severe downturn in US housing and credit markets.”

“‘There is no doubt that securitisation is going to be seriously challenged,’ said Greg Medcraft, managing director and global head of securitisation at Societe Generale in New York. ‘We could be in for a period of painful adjustment.’”

“A securitisation trust linked to the struggling Countrywide Financial Corp, the US’s biggest home lender, was accused of securities fraud in an action filed by a California law firm. It’s believed to be the first time a securitisation trust has faced a possible class action suit.”

“Mr Medcraft said the system of selling home loans into a secondary securities market needed reform because risk had become too disseminated. Too often, he said, loan originators and lenders were left with ‘no skin in the game.’ This, along with the need to restore confidence in ratings agencies, was among the biggest challenges.”

The National Post. “Alberta bank ATB Financial has set aside $79.6-million for potential losses and restructuring costs on asset-backed commercial paper. ATB president Dave Mowat said Aug. 28 that ‘there isn’t any impairment of the underlying asset.’”

“On Friday, however, he acknowledged ‘this is a serious financial event for ATB.’”

The Washington Post. “Investors already burned by turmoil from the credit crunch are now worried about unwanted surprises in the industry that insures bonds.”

“In the face of mounting losses in U.S. mortgages, rating agencies are reviewing eight leading bond insurers, which could lead to downgrades. Such a move could ripple across the financial sector, because if a bond insurer is downgraded, most of the securities it has blessed as virtually risk free are likely to follow.”

“‘It would have a domino effect on all of the entities that hold these vehicles,’ said Ed Rombach, a senior analyst at Thomson Financial. ‘They would have to have more write-offs. It’s a vicious cycle.’”

“Moody’s Investors Service and Fitch Ratings are examining the capital levels and structured debt these firms have insured because they are worried that the deterioration in the mortgage market may expose them to greater losses. Moody’s expects to finish its review next week. Fitch said it would complete its review within three weeks.”

“‘The people watching this are not going to say, ‘I’m so happy they’re going to be downgraded only to double-A,’ said Sylvain Raynes, a founding principle of a structured-finance consultancy. ‘They’re going to say, ‘This is the beginning of the end.’ And they’re going to want to go before everyone else goes. This is a stampede.’”

From MSNBC. “Borrowers who took out loans in the first six months of this year are already falling behind on their payments faster than those who took out loans in 2006, according to a report from investment bank Friedman, Billings Ramsey. That’s making it even harder for would-be buyers to get new mortgages.”

“This example illustrates the distress many homeowners are in or will find themselves in: A subprime adjustable-rate mortgage on a $400,000 home could have payments of about $2,200 a month, with borrowers paying 6.5 percent, interest only. When the teaser period expires, that payment becomes $4,000, with the homeowner paying 12 percent and now having to come up with principal as well as interest.”

“Minneapolis resident Chad Raskovich found himself in a such a situation. He hoped — it turned out, in vain — to gain more equity in his home and that a strong record of payments would enable him to secure a better loan later on.”

“‘It’s not just me, it’s a lot of people I know. The housing market in the Twin Cities has dramatically changed for the worse in the years since I purchased my home. Now we’re just looking for a solution,’ he said.”

“Today’s financial system is interconnected: Mortgages are sold to investment firms, which then slice them up and package them as securities based on risk. Then hedge and pension funds buy up such investments.”

“When home prices kept rising, these were lucrative assets to own. But the ongoing collapse in housing prices has set off a chain reaction. This has resulted in more than $500 billion of potentially worthless paper on the balance sheets of the biggest global banks — losses that could spill into the huge pension and mutual funds that also invest in these securities.”

“‘We all know that more hits from these subprime loans are coming, but are having a devil of a time figuring out how it will happen or how to stop it,’ said economist Thomas Lawler, who was once chief economist for Fannie Mae. ‘We’ve never been in this situation before.’”




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112 Comments »

Comment by Ben Jones
2007-11-24 08:47:03

Man, this is coming apart fast. If MS does end, it will change the financial system substantially, not to mention the housing market. IMO, if it is going to collapse, it is already baked in the cake and can’t be avoided.

Comment by matt
2007-11-24 10:11:50

I think it’s close to being dead. Only a fed guarantee will save securitization.

Comment by Ben Jones
2007-11-24 10:33:02

Ah, yes, the all powerful, all knowing US Government. In case you haven’t noticed, these guys can’t tie their shoestrings these days, much less pay their bills or guarantee a garage sale.

Comment by matt
2007-11-24 10:39:44

An election is coming up. Asset backed has yet to reach bottom.
http://research.stlouisfed.org/publications/usfd/page17.pdf

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Comment by boulderbo
2007-11-24 10:49:44

they’re all busy passing legislation that ensures that almost everyone will be excluded from getting a mortgage. yeah, this thing is spiraling fast, good reason for the stock market to rally next week.

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Comment by matt
2007-11-24 10:53:08

Retail will rally the market next week, should see stops tripped at 13k dow, 1450 s&p.

 
Comment by txchick57
2007-11-24 11:26:48

I was going to try to play the bounce but I just don’t have it in me. I’ve had a good year, why screw it up now. Just waiting for the optimal time to get the January puts again.

You guys see this yesterday?

http://www.reuters.com/article/reutersEdge/idUSN2318057620071123

 
Comment by aladinsane
2007-11-24 11:30:59

checkmate.

 
Comment by tuxedo_junction
2007-11-24 12:11:38

FNMA & FHLMC will continue to push mortgage securities into the market but capital problems will preclude adding loans to their portfolios. Of course if OFHEO acts like FSLIC/FHLBB did in the early 1980s and effectively remove capital requirements, then FNMA & FHLMC will grow to the moon.

A problem for FNMA & FHLMC is that as public companies they’re stuck with reporting in accordance with GAAP. Will FASB promulgate special rules so that the GSEs can hide balance sheet insolvency?

 
Comment by Professor Bear
2007-11-24 12:42:29

“Will FASB promulgate special rules so that the GSEs can hide balance sheet insolvency?”

Maybe the GSEs could join in on the Superfund-SIV plan. Or even become the toxic waste dump for devalued sump-prime securities?

 
Comment by hd74man
2007-11-24 13:27:44

Mazzland legislature refused the state’s AG, Martha Coakley’s, recommendation to come up with a specific definition of exactly what constitutes MORTGAGE FRAUD in the Commonwealth.

The fix remains in…deep.

 
Comment by jerry from richardson
2007-11-24 16:07:15

A problem for FNMA & FHLMC is that as public companies they’re stuck with reporting in accordance with GAAP.

If you haven’t noticed, FNM hasn’t reported in years and they’re still on the NYSE. They are untouchable because of the tens of millions they have given to both corrupt parties. Nobody was even charged in the Frank Raines led $10 billion accounting scam.

 
Comment by Awaiting Bubble Rubble
2007-11-24 16:40:12

“I was going to try to play the bounce but I just don’t have it in me. I’ve had a good year, why screw it up now. Just waiting for the optimal time to get the January puts again.”

txchick, I’m looking for some good consumer discretionary June-2009 puts to buy on Monday’s pop. I’m thinking of adding to my Jan 09 leaps on BBY and ETH. Any suggestions?

 
Comment by Awaiting Bubble Rubble
2007-11-24 16:41:22

“June-2009 puts” = May-June 2008 era puts and Jan 09 leaps.

 
Comment by matt
2007-11-24 22:12:12

Retail is going to drag the market higher, sales up 8% over last year. BBY is going to run, i was looking for a pop over 50. ETH might run back up to close to 32. IMO.

 
 
Comment by NYCityBoy
2007-11-24 10:53:54

“Ah, yes, the all powerful, all knowing US Government. In case you haven’t noticed, these guys can’t tie their shoestrings these days, much less pay their bills or guarantee a garage sale.”

I think the boobs at the top are starting to realize this, Ben. They are now realizing how helpless they are to stop this. I’m sure that many are just hoping they can make it to retirement before it all blows up. This time the system went too far. This was plain and simply about greed and stupidity.

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Comment by Ben Jones
2007-11-24 11:00:31

NYCB,

They are boobs and on Wall Street too. All they can pull-off is to bamboozle and steal from the US citizen, which is no great feat. Look at how easily distracted and intimidated people are.

 
Comment by NYCityBoy
2007-11-24 11:05:50

“It’s no trick to make a lot of money if all you want is to make a lot of money.”
- Bernstein in Citizen Kane

I agree about Wall Street. The only great thing that could come out of this disaster is for the public to understand just how rotten the financial system is.

 
Comment by combotechie
2007-11-24 12:07:01

“The only great thing that could come out of this disaster is for the public to understand just how rotten the financial system is.”

The public doesn’t care how rotten the system is as long as they can get in on the action.
It’s only when the action turns against them that they begin to care.
The days of Enron and the DotCom should have taught the something-for-nothing crowd a lesson; apparantly it didn’t.
Maybe the tuition for the lesson wasn’t set high enough.

 
Comment by Professor Bear
2007-11-24 12:29:51

“Maybe the tuition for the lesson wasn’t set high enough.”

Experience keeps a dear school, but fools will learn in no other.

– Benjamin Franklin –

 
 
Comment by Leighsong
2007-11-24 14:36:07

Ben,

You made me chuckle. The other day you refered to the SIV thingy. (I laughted out loud). I see you’re in my camp.

Hoz and I have bet a case of beer that:

Hoz: it will be formed (the M-LEC)
Me: Naw (too large and as you noted, they can’t tie their own shoes!)

Thanks for the chortle!
Leigh

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Comment by Leighsong
2007-11-24 14:42:21

oops…that was NYC! (shoestring quote)

 
 
Comment by crush
2007-11-24 19:48:19

That Ben, is quite appropo…nice one!

crush

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Comment by Professor Bear
2007-11-24 10:42:04

You put your finger on the reason that some highly paid analysts are doubtless slaving away through the weekend (even as I type) trying to rush together a version of the Bernanke-Schumer GSE-Bailout Act.

Comment by Ben Jones
2007-11-24 10:55:33

Yeah, PB, you keep looking for that bail-out. BTW, what happened to that SIV fund they ‘announced’ a couple of weeks ago? Anyway, from the latest house action, it looks like it your side of the room that is blocking GSE reform.

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Comment by matt
2007-11-24 11:01:35

There’s not enough pain out there, yet….
I’ll give them to the end of Q1 to come up with something.

 
Comment by NYCityBoy
2007-11-24 11:07:54

Where are the funds to pay for it going to come from? They can’t pretend that loading up Fannie and Freddie will be a free ride.

The scary thing right now is that they are already loading the Federal Home Loan Bank (FHLB) with this toxic crap. The taxpayers will already be on the hook for that when it goes south.

 
Comment by Professor Bear
2007-11-24 11:19:05

I only ‘keep looking’ for the bailout because I am fully aware of how important it is to shine the bright light of your blog on the dark caves in which stealth policies are developed.

Look at the recent Senate hearings for an example of how these guys operate. There were no media stories about bailout proposals for weeks on end. Then BB and Schumer have a brief discussion at the Senate hearing of what would be a ‘reasonable’ limit on the size of a loan the GSEs could guarantee (I guess $1m is a reasonable upper limit on what qualifies as “affordable housing”?), and suddenly bailouts are back on the table.

 
Comment by matt
2007-11-24 11:30:16

“Where are the funds to pay for it going to come from?”
More debt. The big question is: Will Asia continue to fund this mess?

 
Comment by aladinsane
2007-11-24 11:33:28

Atlasia Shrugged

 
Comment by verjeep
2007-11-24 11:55:52

Given the lack of good investments anywhere else, they just might. After all, there is only so much gold that china can buy. Europe looks a little better right now, but who knows when they are going to really feel the pain of the real estate bubble of their own.

 
Comment by Professor Bear
2007-11-24 12:38:06

“Will Asia continue to fund this mess?”

It appears they are on to the money printing press concept. I see no reason they would not continue funding the mess, so long as their printing presses are in good working order.

 
Comment by Professor Bear
2007-11-24 12:58:26

“I’ll give them to the end of Q1 to come up with something.”

Here is the bottom line on ad hoc bailouts:

They only become politically viable when a crisis becomes sufficiently bad to legitimize actions that would normally be considered foolhardy. We’re not there yet, but will be soon, as Matt suggested.

 
Comment by Professor Bear
2007-11-24 15:09:38

“The scary thing right now is that they are already loading the Federal Home Loan Bank (FHLB) with this toxic crap. The taxpayers will already be on the hook for that when it goes south.”

The really scary thing is that ‘it’ already went south, but nobody yet knows exactly how close to the south pole it already is. However, I don’t expect politicians to let an appraisal fraud investigation or unresolved questions about how far the value of GSE-held mortgage assets has dropped to stand in the way of a rush to bailout when the situation looks sufficiently grim to justify pushing the panic button.

 
Comment by jerry from richardson
2007-11-24 16:11:33

Just because the goobermint can’t fix it right does not mean they won’t throw more taxpayer money down the bottomless pit. They have to save their banker buddies.

 
Comment by Professor Bear
2007-11-24 17:00:02

Ben, to answer your question about “what happened to the superfund SIV,” check out the article below. It is somewhat amusing to me that they keep vacillating on whether the size of the fund will be $75 bn or $100 bn — did they lose their pencil sharpener or something?

And BTW, is BlackRock part of the PPT these days? (Perhaps Brad could enlighten us on this one, since he is clearly an authority on the PPT…)

SIV-Plan Founders to Seek
More Support for Superfund
By ROBIN SIDEL and DIYA GULLAPALLI
November 23, 2007; Page C2

The three big banks assembling a plan aimed at thawing credit markets are expected next week to start soliciting their industry brethren to pitch in with the effort, according to people familiar with the situation.

The move will be a significant step in forming the so-called superfund that has been in the works since September. It is aimed at providing an alternative for off-balance-sheet entities called structured investment vehicles that have run into trouble amid a lack of liquidity in credit markets. The SIVs issue short-term debt to buy other, higher-yielding assets but have been hurt by market upheaval that has left buyers for that debt on the sidelines.

The fund will create a potential buyer for SIV assets. SIV managers won’t be required to sell assets into the fund, which will only buy high-quality assets in an attempt to maintain investor confidence in the fund.

In another sign of progress, BlackRock Inc. is expected next week to be named the manager for the $75 billion to $100 billion fund, people familiar with the matter said. In that role, BlackRock will be considered a neutral party and will help set pricing for the assets. As of now, it doesn’t appear BlackRock would invest in the fund.

http://online.wsj.com/article/SB119577885324101647.html?mod=googlenews_wsj

 
Comment by Leighsong
2007-11-24 23:50:03

P’Bear! I do luv ya!

Are you trying to kill me?? BlackRock?? Oh God, just shoot me now!

I see we must also bet…er…something…hmmm…a nice tome? (If the powers to be put this together by 1/30/08?)

Thank you for the laughter! (I’m not laughing at you).

You are awesome P’Bear. I cannot match your insight.

I do however, humbly disagree, Sir. (I do want you to be correct in your assessment).

Best,
Leigh

P.S. (It’s not an official bet!)

 
 
Comment by Leighsong
2007-11-25 02:12:23

P’Bear…we gotta do something with these kids!

http://www.washingtonpost.com/wp-dyn/content/article/2007/11/22/AR2007112201082.html

From the article:

…Fannie Mae reported a $1.4 billion loss…

…Freddie’s quarterly loss of $3.29 per share was more than 10 times what analysts had forecast…

…. It also didn’t seem terribly feasible, given what federal regulators require as a ratio of the companies’ core capital to the value of loans they own or guarantee. To be sure, the ratio is now higher than the law requires, but the two firms accepted that as part of settling their accounting scandals…

WHAT two firms? Which financials? Dang!!

grrr…
Leigh

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Comment by matt
 
Comment by david cee
2007-11-24 10:51:25

Hostage Value

Because foreclosures in Massachusetts have tripled in the last year, the governor set up a $250 million rescue fund to try to help families get out of crazy mortgages and into affordable, fixed mortgages. The Globe reports today that so far not one single family has qualified for the rescue. Other states with similar funds are also reporting dismal results. There are many reasons for the failure, but a critical problem is the hostage value of the house.

A side note for the Not-Commercial-Law-Jocks: “Hostage value” in secured lending refers to the ability of a secured lender to extract a payment in excess of the value of the collateral from a borrower by threatening to reposses the collateral. The classic example was the old practice of taking a security interest in all of a family’s household goods, which might add up to a resale value of $2000, then demanding that every penny (plus interest) of a $10,000 loan be repaid before the security interest would be released. This version of the practice involving household goods is now banned by the FTC. In bankruptcy law, undersecured claims would be bifurcated into its secured ($2000) and unsecured ($8000) portions (see Bob Lawless’s recent post).

Rescue programs limit their payouts to 100% of the value of the property, which makes sense both to protect the fund and not to reward the mortgage lenders by paying them more than they could get for the house if the family gave it back to the lender. But the mortgage lenders want more. If they don’t get it, they won’t release the mortgage–even though the lenders won’t get anything close to 100% of the value of the home if they are forced to foreclose. They hold the home hostage: Pay the amount the mortgage company wants or move out of the house. Some families will find the money to pay, and others will lose their home.

The mortgage lenders are counting on the leverage of their hostage taking to do better than 100% payment. So long as they hang on. rescue efforts are irrelevant and renegotiation won’t work.

The bankruptcy amendments that passed the House this week would break the hostage value of the home. The amendment would give families a chance to negotiate deals that would take them out of ruinous mortgages and let them get into something that is affordable–with or without a rescue plan. The mortgage industry oppses the bill, saying it will decide “voluntarily” when they will or will not turn a homeowner loose–which is another way of saying they want to hang on to the hostage value

Comment by txchick57
2007-11-24 11:39:24

What’s your cite to that?

Comment by Leighsong
2007-11-24 14:50:00
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Comment by reuven
2007-11-24 12:09:08

Rescue programs limit their payouts to 100% of the value of the property, which makes sense both to protect the fund and not to reward the mortgage lenders by paying them more than they could get for the house if the family gave it back to the lender.

This makes sense? Maybe it makes sense under a tyrannical communist government, but it doesn’t make sense here.

The borrower needs to be responsible for the amount he borrowed, not the current “value” of the house. Otherwise he’s getting income w/o being taxed on it, among other things.

Now, I really have no strong opinion about forcing sleazy lenders to put these people into a more sensible mortgage. Give them the option of refinancing into a 30-year fixed at 6.1%. The amount financed needs to be WHAT THEY PAID for the house (minus, of course, any equity in it.)

If they can’t pay a traditional 6.1% fixed 30-year mortgage on the price they paid for on the home, then they could NEVER have afforded that home under any circumstances! The best they could have hoped for is to sell the home when the teaser rate expired and make some $$$ if they could find a greater fool.

Since these folks obviously had NO INTENTION of actually paying off a mortgage on the house, then any taxpayer funded bailout is the most disgusting, obscene thing I’ve heard today. (but it’s still early!)

Comment by az_lender
2007-11-24 19:06:58

I’m with you Reuven. These “buyers” should have their purchases liquidated just like stock speculators who cannot meet a margin call.

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Comment by hd74man
2007-11-24 13:36:47

RE: The Globe reports today that so far not one single family has qualified for the rescue.

Stupid is as stupid does…All I got out of the Globe article was the sound and fury of the gov, housing authorities, and the legislature giving the appearance of doing something.

I figure the chance of quasi-literates who can’t understand an APR to be able to comprehend and follow the legal machinations of the Mazzland politico’s to be about nil.

It’s all too big to fix anyway.

 
 
Comment by hwy50ina49dodge
2007-11-24 12:16:44

“Pay”… very close attention to the last sentence:

“It would be devastating — but I don’t think that would happen at all, there is no chance of that.”

And any move away from the mortgage market would destroy their stock prices — both of which are already trading at around 10-year lows.

“Fannie Mae and Freddie stocks would collapse because there would be no growth prospects,” for the companies, Sowanick added.

Dan Fuss, vice-chairman of Loomis Sayles, which manages $100 billion in fixed-income assets, said he doesn’t believe Fannie and Freddie will stop buying mortgages.

And he points out: “You need a public policy response to the housing crisis.”

http://www.reuters.com/article/reutersEdge/idUSN2318057620071123?sp=true

Comment by Leighsong
2007-11-25 01:11:58

From the article:

Few think the two companies are likely to pull out of the housing market, even temporarily. However, if the stream of home loan failures were to force the companies to suspend new mortgage investments, the market for mortgage bonds would “freeze up,”

Suspend new mortgage…hmmm…er…as in the house and senate are on vacation?

Freeze…hmmm…er…as in…NO more Fred and Fannie, oh those naughty ones!

Poor holiday season…ya think they will work off the clock?

I wonder? (Sometimes they do!)

 
 
Comment by Groundhogday
2007-11-24 12:29:13

Until recently, I’ve been primarily focused on the housing bubble: homes are not remotely affordable, annual appreciation has been far above historical norms, etc…

But now, like most of the folks on this blog, I’m starting to see the housing bubble as merely a symptom of the much larger problem: a high leveraged, speculative, non-transparent financial system. And this system is unwinding in a surprisingly big hurry.

But my experience over the holidays suggests that most folks out there only know about “subprime” being in trouble, a “slow” year for real estate, etc… I see very, VERY little fear out there when a healthy fear is warranted.

Comment by Leighsong
2007-11-24 14:57:50

Hi Groundhog,

When I first came out of lurking, one of my first post was this link:

http://www.financialweek.com/apps/pbcs.dll/article?AID=/20070912/REG/70912006/1036

I couln’t comprehend the article at the time, but it made my stomache queesy.

I quickly tied Wall Street to this mess we’re in. Just seemed natural to me.

This was just weeks before talk of the Super SIV (aka M-LEC).

How quickly time flies!
Leigh

 
 
Comment by hd74man
2007-11-24 13:24:06

RE: Coming apart fast…

Faster than we think.

http://biz.yahoo.com/ap/071124/apfn_doomsday_scenario.html?.v=1

Comment by Professor Bear
2007-11-24 16:14:58

Which brings me back to the point of why I believe a bailout is still in the works. Once enough folks have joined the tinfoil-hat “doomsday” scenario camp, the requisite political support will be in place, and the fix will be soon to follow. Unless it is different this time!

Comment by Leighsong
2007-11-24 23:55:59

I want you to be right. I really do. I pray for this.

Best,
Leigh

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Comment by CA renter
2007-11-25 03:02:17

Well, not to be a poo-poo head, but I hope you’re wrong, PB! ;)

Though, as you might know by now, I’m in your camp and think a bail-out (failed and foolish as it may be) is in the works.

That being said, I am 100% against any govt bailout. However, if the govt were to confiscate ALL the personal assets of all the “playas” involved, I’d be happy to see their winnings (all the wages, commissions & bonuses over the past few years) used to fund said bail-out.

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Comment by JamesRaven
2007-11-24 10:12:07

Ben and the Overhang Gang… The Wall Street Journal isn’t drinking the KoolAid today…

While many accounts portray resetting rates as the big factor behind the surge in home-loan defaults and foreclosures this year, that isn’t quite the case. Many of the subprime mortgages that have driven up the default rate went bad in their first year or so, well before their interest rate had a chance to go higher. Some of these mortgages went to speculators who planned to flip their houses, others to borrowers who had stretched too far to make their payments, and still others had some element of fraud.

Now the real crest of the reset wave is coming, and that promises more pain for borrowers, lenders and Wall Street. Already, many subprime lenders, who focused on people with poor credit, have gone bust. Big banks and investors who made subprime loans or bought securities backed by them are reporting billions of dollars in losses.

The reset peak will likely add to political pressure to help borrowers who can’t afford to pay the higher interest rates. The housing slowdown is emerging as an issue in both the presidential and congressional races for 2008, and the Bush administration is pushing lenders to loosen terms and keep people from losing their homes.

Comment by SoBay
2007-11-24 10:33:45

The reset peak will likely add to political pressure to help borrowers who can’t afford to pay the higher interest rates.

- I can’t help but think of the FB (most all) who had interest only loans. The delta went in the wrong direction both ways..
1 - The principle amount increased via interest only payment
2 - Appraised home value went down substantially

This is exactly like the hedge funds. They hired all of these propellor heads to create these ‘black box’ formulas for trading and there historical data let them down and went upside down both ways (Long and Short).

Comment by NYCityBoy
2007-11-24 10:58:45

“They hired all of these propellor heads to create these ‘black box’ formulas for trading and there historical data let them down and went upside down both ways (Long and Short).’

The more of those propeller heads I meet, the more f’ed I think we are. They are like religious zealots. They believe nothing wrong has been done. They will keep doing this crap until they are no longer able to do it. Every little attempt to keep this mess going will be met with great rejoicing by the zealots.

Comment by diogenes (Tampa,Fl)
2007-11-24 12:59:04

yea, well, really historical data was irrelevant.
when you change the method by which you do business, how can you expect the same results by comparing a contrasting methodology??
The whole idea of using historical data as any kind of metric made me laugh. The problem was, the people with the “brains” in these industries did just that. Who’s running the asylum?

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Comment by Leighsong
2007-11-24 23:59:14

Quants…

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Comment by jerry from richardson
2007-11-24 16:24:50

The data didn’t let them down. It was their poor choice of sampling. Anybody who has taking statistics or quant knows that you have to start with appropriate data. These prop heads chose a foreclosure data set from 2002-2005 and used assumptions that RE prices would continue to appreciate at double digits into infinity. They rufused to believe that RE prices could ever go down, much less stay flat. They drank the NAR Kool-Aid. What a pity. Hundreds of thousands spent on getting a PhD from Harvard and Georgetown, yet they are so easily hoodwinked by ex-bartenders and strippers with GED’s.

 
 
Comment by Leighsong
2007-11-24 15:08:14

From the article:

Ms. Bair has proposed that mortgage companies freeze the interest rates on some two million mortgages at the rate before the reset to help borrowers avoid trouble. “Keep it at the starter rate,” Ms. Bair said at conference last month. “Convert it into a fixed rate. Make it permanent. And get on with it.”

Personal experience: Higher ups screaming, just make it a go! I don’t want excuses!

Me, calm, always keeping eye contact: Well now that we’ve identified the outcome, let’s say we discuss a REAL solution.

Never failed me in my 21 years of honorable service.

Scream all you want. Until you sit you butt down and look at HOW to solve the problem, saying what outcome you desire is just plain foolish.

Even more foolish are those who allow tirades noted above!!

Stop the insanity!
Leigh

 
 
Comment by exeter
2007-11-24 10:16:07

The wheels might be coming off quickly but I’ll wager the fallout will be long lasting. I had the joy of talking to an RE Koolade drinker yesterday and he asked “how long will this last” after finally coming to grips with the fact that the game is over. I told him we’re in the first inning…….. dead silence on his part. This guy is one of those who is, rather was absolutely convinced that “the millionares are coming”. Typically he is a logical, frugal but simple kind of guy but his mistake was believing propaganda spewed by the unholy alliance of DC/K Street/NAR/WallStreet.

Also, don’t under-estimate the tenacity and endurance of the Albany, NY Attorney Brotherhood.

Comment by NYCityBoy
2007-11-24 11:01:57

I used to tell my boss that this would bottom in 2013. I would hear belly-laughter. I have stood by that position the entire time. Now when I say it, dead silence. Every day more and more people are understanding what is going on. That will only lead to the downturn as fewer and fewer fools are left to be fooled with the REIC’s electronic fooling machine.

Comment by exeter
2007-11-24 11:57:02

I’m not sure this idea came from that a bust is 6 months and then the market resumes an upward trend. I’m in my 40’s and recall the late 80’s boom and 90’s bust and there was nothing speedy about it. It almost seemed endless as the boom actually started in 1982-83 and ran wild until 1988/89. Prices sank from ‘89 to 2001, at least in New England.

I hear alot of stupid talk about a 6 month bust, ESPECIALLY from youngsters. I only laugh and think of the fact that when I was marching with an M16 and 60lb. pack, these same little retards were shitting yellow.

Comment by hd74man
2007-11-24 14:12:08

RE: I’m in my 40’s and recall the late 80’s boom and 90’s bust and there was nothing speedy about

Exeter-You’re pretty damn accurate on your boom and bust dates. What everybody needs to remember, is that in the ‘90/’91 bust, mortgage interest rates were still declining from the Jimmi Carter days which did facilitate the ATM refi game for homeowner’s who didn’t buy from ‘87/’89.

The party did get shut down in 1994 when Greenspam jack rates from like 7.5 back to the high 9’s. And as tough as ‘94 was, there was no panic like there is now. And so things limped along. However, generally speaking overall values in ME were stagnant for a decade from the onset of the early 90’s

But when Greenspam crashed those rates after 9/11. Katie bar the door, he unleashed the hounds from financial hell.
Now everybody thinks they are entitled to 3% money for house financing. There’s is no declining rate wiggle room now as evidenced by the mounting panic.

So throw in a 3/5 year period for a general value decline and a decade long stagnation period for inflation-this bust could go out 15/20 years.

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Comment by Leighsong
2007-11-25 00:10:03

Hi Exeter!

…these same little retards were shitting yellow…

I’m close to your age. Me thinks things may be unwinding a tad bit faster (no, not six months!)

Why?

To the best of my knowledge, no one has a compass to guide us through this…er…

Deflationary cycle?

Respectfully,
Leigh

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Comment by Leighsong
2007-11-25 01:28:11

Have you ever been in slow motion? That slow crawl up…click…click…the accent of the rollercoster!

Ya know what’s coming!

Click…click…click…

Wooooosh!

Look Ma, no hands!

Weeeeeeeeee!
Leigh

 
 
Comment by IllinoisBob
2007-11-24 10:22:00

Talking with my sister over the holidays on the mortgage mess & she mentioned that the AAA rated muni bond issuers are having problems creating new securities. The troubles are due to the meltdown with the bond insurers. The sub-prime disease is spreading much deeper than I really expected. She is a 20+ year veteran broker in the securities industry, involved with the Chicago area pension funds.

Comment by M. Easton
2007-11-24 11:49:16

I recently dumped my tax free bond fund. There are going to be some states facing massive deficits as property tax revenue plunges.

Comment by CA renter
2007-11-25 03:12:02

Agree. It’s why I’ve been staying out of muni bonds (and any govt bonds, other than Treasuries).

Just got our water bill & they’re crying about how the slowing of the housing market is going to substantially impact their revenues & their wholesalers are jacking up the prices by 7-10%.

The govt entities will be hurting just as much as anyone else, just that there might be a time lag.

BTW, I have very little hope that govt pensions (or any pensions, for that matter) will be funded in the years to come. Between lack of pensions, SS, Medicare & declining 401Ks, etc. — all happening as the largest population bulge enters their retirement years — the coming years may be very bleak, indeed.

Imagine what all that’s going to do to housing prices for a long, long time to come…

Serious stagflation coming.

 
 
 
Comment by SoBay
2007-11-24 10:26:29

ATB president Dave Mowat said Aug. 28 that ‘there isn’t any impairment of the underlying asset.’”

“On Friday, however, he acknowledged ‘this is a serious financial event for ATB.’”

- If any spokesperson is quoted as saying, ‘there isn’t any impairment of ……’, RUN for the Fuhrer Bunker! You know that they are lying.

Just this week our Gov A. Swarchenegger explained that he and 4 lenders had ’saved the day’ for CA homeowners! Run for your lives when you hear this tripe and keep your hand on your wallet.

Comment by aladinsane
2007-11-24 10:32:33

It’s me, Dave. Open up, man, I got the stuff.

Comment by combotechie
2007-11-24 10:51:05

Dave’s not here.

 
 
Comment by Neil
2007-11-24 12:41:01

- If any spokesperson is quoted as saying, ‘there isn’t any impairment of ……’, RUN for the Fuhrer Bunker! You know that they are lying.

ROTFL. The “special kool aide” is in the Fuhrer bunker. The stuff that takes away all of the pain!

Its looking like the next four months will do a lot of shaking out. The CMBS market will have to do a restart with new rules. Can we say large down payments? ;)
Got popcorn?
Neil

 
 
Comment by SUGuy
2007-11-24 11:21:06

I am very thankful to all the bloggers as well as to Mr. Ben Jones. I do have a question and am hoping perhaps the real smarties on this blog can answer. Ladies and Gentleman how can I being a cash buyer decide when is it a good time to buy. I am keeping my eyes on several properties that are for sale. The assessed values are around 350 to 375 and the asking prices are beginning to drop from around 550K to now around 450K. These are fairly new houses. A house in our area of central NY with a price tag of 400K will usually have about 17K in taxes.

http://www.cnyhomes.com/Listing/

Comment by REhobbyist
2007-11-24 12:09:35

SU: Not before 2009.

 
Comment by Bubblewatcher
2007-11-24 12:13:40

IMHO — keep an eye on rents. When you can put 20% down on a home and get a fixed-rate mortgage with a monthly payment roughly equivalent to (or lower than) what the place would rent for, jump on it.

Comment by sm_landlord
2007-11-24 15:23:05

Watch out with that formula. In my area, the few SFHs that are for rent are asking as much as a mortgage payment, but that doesn’t mean it’s time to buy. Check out these beauties:

http://losangeles.craigslist.org/wst/apa/485018132.html
http://losangeles.craigslist.org/wst/apa/485820880.html
http://losangeles.craigslist.org/wst/apa/486790534.html

 
 
Comment by tuxedo_junction
2007-11-24 12:23:29

Find an old-timer real estate agent who handles rentals. Get from him, or her, the price to monthly rent ratio from the last market bottom. Also, get the Credit Suisse home-loan reset chart. When the resets are over and the price:rent ratio is at traditional bottom levels then is the time to shop for real. You may not actually want to buy at that time because there will probably be an overshoot of the bottom; wait 6-12 months.

Also, don’t forget that, as you probably know, upstate New York is Appalachia. Lack of local purchasing power, and no sign (or hope) of economic growth, play a big part in the housing value equation.

All plans go out the window if the Fed and US Congress adopt a hyper-inflation strategy. In that case, house prices will rise in nominal terms but stagnate, or fall, in real terms.

Getting the most for your money on a house purchase is a tricky, complex, business. Sort of like managing an investment portfolio.

 
Comment by Michael Fink
2007-11-24 12:31:05

Oh my god. 400K home has a 17K tax bill? That’s absolutely off the charts out of this world nuts. That’s a ~4% mill rate? Where in the heck do you live, and what is the median home value in your town? I can understand if the home values are very low (and your 400K is like 3X the next most expensive house on the block), but otherwise…

WTF are they doing with all that money? Cheap tax states are about 1% of value. Here in FL, we are convinced the market will fall to pieces if everyone has to pay 2% of value (the market will fall to pieces, but for other reasons).

My god.. 4% of value is just unreal.

Comment by tuxedo_junction
2007-11-24 13:10:40

New York State has extremely high real property taxes; anywhere from 3% to 5% of approximate market value. There are decent reductions; however, for the elderly and combat era vets. My parents, in NY, pay relatively little in property taxes (over 75, WWII vet).

 
Comment by Groundhogday
2007-11-24 16:09:34

My brother-in-law pays about 3.5% property tax in a rural, up state New York community. His tax bills are actually on par with the mortgage payment (given a relatively large downpayment).

From what I can tell, a declining economy with increasing public pension benefits and increasingly elderly population leaves the working population shouldering a larger and larger share of the tax burden.

Comment by jerry from richardson
2007-11-24 16:16:23

Don’t worry. Millions of illiterate uneducated illegal immigrants will solve all of our problems. They’ll save housing, social security, medicare and pay off the national debt.

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Comment by SUGUY
2007-11-25 14:56:56

I would like to thank all the very genuine, smart, intellectual and kind people for sharing their thoughts and giving us some suggestions on our housing situation in Syracuse, NY

For your information these are the listings I was talking about. What can we do?

http://www.cnyhomes.com/Listing/Search/info.cgi?mlnum=180912

Taxes on this house are $28,659 Asking price 750,000 has been reduced

http://www.cnyhomes.com/Listing/Search/info.cgi?mlnum=174764
Taxes are about 18K Asking price 570K. The taxes are based on a lower assessed value

http://www.cnyhomes.com/Listing/Search/info.cgi?mlnum=179568
Taxes are 21K asking price is 569K

http://www.cnyhomes.com/Listing/Search/info.cgi?mlnum=183165
Taxes about 20K asking price 550K

http://www.cnyhomes.com/Listing/Search/info.cgi?mlnum=182737
Taxes are 18K asking price 450K

http://www.cnyhomes.com/Listing/Search/info.cgi?mlnum=177748
Taxes 17K asking price 429K

http://www.cnyhomes.com/Listing/Search/info.cgi?mlnum=177967
Taxes 17.5K Asking price 409K

http://www.cnyhomes.com/Listing/Search/info.cgi?mlnum=182773
Taxes about 13K asking price 350K.

All of these homes and many others sit on the market for several years. So if we pay inflated bubble prices then we are stuck with higher taxes for ever.

You can buy land for about $1000 to $2000 per acre. The amish are flocking to this state. The realtors say that we have Equity Nomads moving here from California. Please Cali people keep the riff raff in your state. They are the ones creating our bubble according to the realtwhores.

BTW you can rent a two bedroom, 1 ½ baths, 1100 sq ft penthouse style type of an apartment on a high floor for around $1000 utilities included with heat and air conditioning.

Dairy farms are another cheap buys around here. A well established dairy farm with a few hundred tillable acres or an apple farms can be bought for less 300K.

 
 
Comment by HedgeFundAnalyst
2007-11-24 13:53:42

National City website has a pretty good housing heat map to show valuation versus trend.

As others have said, rule of thumb is that 20% down PITI should equal monthly rent. That’s when it’s a no-brainer. I usually throw in a few hundred $ for tax break.

It’s really not rocket science, that’s what makes the whole thing so absurd and the arguments with those who ask, “why you are renting”, totally absurd.

Comment by Professor Bear
2007-11-24 16:44:37

Dude — Is the hedge fund industry in a slowdown or something? We haven’t heard from you in months…

Comment by CA renter
2007-11-25 03:17:35

Years?

I know you two have your history, but I’m glad to see HFA. He/she had a fair amount of insight & different perspective than many of us.

Have to admit, HFA was right on the stock market & I believe he/she was recommending sugar right before it took off.

What are you thinking about the stock market now, HFA?

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Comment by HedgeFundAnalyst
2007-11-25 09:10:06

Prof Bear, you’re kidding right? This is the best year for the hedge fund industry in aggregate since 2002. S&P500 is flat and the hedge fund index is up 10%. There are blow ups in every strategy every year, sure, but as a Professor you probably know about diversification.

Haven’t posted because I have been busy, but this is usually a slow time, so hopefully we’ll all be able to chat more!

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Comment by Leighsong
2007-11-24 15:30:08

I don’t know your area well, SUGuy,

My best advise is to know what you want.

Ask yourself:

Do I (we) want a home? Are we going to move within the next 5 years? Can we heat/cool it? How far must we travel for employment? (Insert a few of your own).

I left out the most important one: are we ready for the commitment?

Really evaluate these questions, and make a decision based on YOUR needs/wants/desires.

With cash, you’re king baby!
Leigh

 
Comment by AnnScott
2007-11-24 15:49:21

Mortgage payment (use 15, 20 or 30 years) + insurance + real estate taxes = rent for the same or similar house

The mortgage interest deduction on a $400,000 will be about $25,000 in the 1st year which means a $7000 savings in taxes actually paid for someone in the 28% bracket (and you better be to afford that place.) You may or may not want to factor that tax savings into your numbers on figuring the comarable rent value. I tend not to include it because houses are expensive. $7000 will just about pay for having the shingles replaced, OR cover 1/2 -2/3rds the cost of a new furnance/AC, OR pay to get the blacktop drive resurfaced, OR get the yard fenced to keep the kids and dog in, OR replace and upgrade 9 or 10 windows, OR pay 1/2 -2/3rds getting it painted……….

 
Comment by az_lender
2007-11-24 19:23:53

Chiming in to agree with most others that rental rates are the key data. You mention being a cash buyer. Probably OK to buy when price is no more than 120x monthly rent. That might not be the absolute bottom, but so what.

Comment by CA renter
2007-11-25 03:20:18

But, what happens to rents in a recession/depression?

Personally, I’d recommend waiting a good while & seeing where the dust settles before you buy. Lots of stuff going on right now & nobody knows when it’ll get “fixed”. Months, years, decades, never????? (sounds TFH, but one must always consider the possibilities, IMHO)

 
 
 
Comment by aladinsane
2007-11-24 11:28:36

“Alberta bank ATB Financial has set aside $79.6-million for potential losses and restructuring costs on asset-backed commercial paper. ATB president Dave Mowat said Aug. 28 that ‘there isn’t any impairment of the underlying asset.’”

“On Friday, however, he acknowledged ‘this is a serious financial event for ATB.’”

[on Dave's return to the ship, after HAL has killed the rest of the crew]

HAL: Look Dave, I can see you’re really upset about this. I honestly think you ought to sit down calmly, take a stress pill, and think things over.

 
Comment by Ghostwriter
2007-11-24 11:46:39

Ohio’s attorney general Marc Dann is suing mortgage brokers and appraisers.

http://www.ag.state.oh.us/press/07/06/pr070607.asp

Comment by Ghostwriter
2007-11-24 11:52:40

This may show up as a double post, but apparently Ohio is also suing Fannie Mae for securities fraud.

http://blogs.wsj.com/law/2007/10/08/spotlight-on-ohio-attorney-general-marc-dann/

 
Comment by hd74man
2007-11-24 14:18:33

RE: Ohio’s attorney general Marc Dann is suing mortgage brokers and appraisers.

No way mortgage insurers are gonna pay out with all these state AG investigations.

Cuamo opened the box.

It’s gonna be wild when the hounds get all the way up to Fan & Fred.

Yeah sure Schumer, more power to the corrupt.

These pigs knew about everything which was going on, despite their pitiful whinings to the contrary.

 
 
Comment by aladinsane
2007-11-24 11:48:23

“When home prices kept rising, these were lucrative assets to own. But the ongoing collapse in housing prices has set off a chain reaction. This has resulted in more than $500 billion of potentially worthless paper on the balance sheets of the biggest global banks — losses that could spill into the huge pension and mutual funds that also invest in these securities.”

“potentially worthless paper”

i.e. P.W.P. (poop)

Who let the dogs out?

Comment by Professor Bear
2007-11-24 12:48:57

With apologies to Spongebob:

POOP = people own our paper

 
 
Comment by Ghostwriter
2007-11-24 11:50:32

Also apparently Ohio has a lawsuit against Fannie Mae for securities fraud.

http://blogs.wsj.com/law/2007/10/08/spotlight-on-ohio-attorney-general-marc-dann/

Comment by Professor Bear
2007-11-24 12:38:54

When will California get into the act? Jerry Brown, where are you?

 
 
Comment by reuven
2007-11-24 12:03:12

I would love to see a successful lawsuit between a FB and an established resident over

- “Your phony valuations caused my property tax to go up!”

 
Comment by Brad
2007-11-24 12:58:41

“Ah, yes, the all powerful, all knowing US Government. In case you haven’t noticed, these guys can’t tie their shoestrings these days, much less pay their bills or guarantee a garage sale.”
———————–
so much for all the blather about the PPT….

 
Comment by CuriousernCuriouser
2007-11-24 13:22:57

ACA Capital Holdings [ACA} is now a penny stock. Doom and Gloom. Nothing looks good. Check out ABK, MBI, AGO, RAMR, MTG. No Christmas spirit in sight.

Comment by jerry from richardson
2007-11-24 16:13:49

What happens when your house burns down and you find out your insurance company filed bankruptcy?

 
 
Comment by Remain Calm. All is Well
2007-11-24 13:40:36

Securitization business is facing a squeeze from both ends. Here’s an interesting post from Broker Outpost, shining sosme light on the numbers from MBA’s New Mtg Applications index.
————————-
Yes, there are still limited opportunites in California
market especially in turning bank turndowns into funded loans.
There are many bank turndowns like never before, i.e.
title seasoning issue, MLS seasoning issue, appraisal issue,
credit issue, loan parameters issue, etc. The market is
in a state of chaos and 2008 will see more problem-plagued
borrowers coming to see brokers and their L/Os.

I sometimes picture myself as an emergency surgeon
operating on mortgage patients all the time. My success
score has not been good lately: 11 came, and 9 dead. Only
2 survived my surgury — which is just 2 loans funded and
the surgeon was not that well paid but good enough to survive
another month.

Humor aside, I think we all will have to downsize and
cut down on expenses and immerse ourselves into intenstive
study of changing program guidelines in order to be able
to turn bank turndowns into fundable loans. I hope my
skills as a mortgage surgeon will help me achieve a better
scoring: only a few dead, and most survived — or fuding
most loans in 2008.

Comment by Leighsong
2007-11-25 00:23:30

Remain Calm,

This is not my house.

Perhaps that blather should stay at MO?

Just sayin,
Leigh

P.S. Again, this is not my house.

 
 
Comment by HedgeFundAnalyst
2007-11-24 13:54:51

I don’t think securitization is a bad thing. It’s the bastardized form of securitization that makes no sense: CDO’s, CDO squared, etc.

Comment by Professor Bear
2007-11-24 22:15:10

How would you *fix* securitization to avoid the current mess happening again in another few years, then? (Or would that be a bad thing, as it would reduce future expected hedge fund profits?)

Comment by HedgeFundAnalyst
2007-11-25 09:12:52

ProfBear, I’d like to keep discussions with me away from the hedge fund industry and focused on housing.

As you well know, the investment banks and ratings agencies made the money in securitizations. Hedge Funds have little to do with that stuff and simply try to make profits where they see discrepancies.

 
 
 
Comment by NoVa RE Supernova
2007-11-24 16:20:47

http://www.larouchepub.com/pr/2007/071112subprime_losses.html

New Report: Subprime Losses Could Hit $500 BILLION. This is orders of magnitude worse than the “experts” or Wall Street are acknowledging.

 
Comment by Professor Bear
2007-11-24 17:03:19

Euro-Zone Banks Hoard Cash,
Prompting ECB to Take Steps
By JOELLEN PERRY and CARRICK MOLLENKAMP
November 24, 2007; Page A4

FRANKFURT — Euro-zone banks are hoarding cash in moves reminiscent of August, pushing up short-term borrowing rates and prompting the European Central Bank to say on Friday it will pump extra funds into markets next week and through the beginning of next year, if necessary.

“The ECB has noted re-emerging tensions in the euro money market,” the central bank said in a statement. It said it will “reinforce” its policy of providing more than usual liquidity “in the upcoming main refinancing operation” scheduled for Tuesday, “as well as in the following ones for as long as it is needed and at least until after the end of the year.”

http://online.wsj.com/article/SB119586223707102513.html?mod=googlenews_wsj

 
Comment by tj & the bear
2007-11-25 00:10:41

Looks like my prior post didn’t make it.

Non-GSE mortgage securitization is DEAD DEAD DEAD. Never would have happened in a “normal” market. The GSE’s have the standardized, high-quality, low-rate market to themselves. That left everything else, which, if due diligence was properly applied, would engender too high a cost to allow for profitable securitization.

Comment by Leighsong
2007-11-25 02:39:53

Pssst…(looking left…looking right)…

What else is left? (hmmm…looking right)…

;) Leigh

 
 
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