Mortgage Swamp

[goprisko]

Re: Mortgage Swamp

Does anyone really think the Chinese Central Bankers will buy Mortgage
Backed Securities?

Aren't they actually dumping them? Assuming they had them in the first place...

INDY

[DemonD]

Re: Mortgage Swamp

Hey Fred (or other itulip staff), I have yet to run across a good analysis on the "work-at-home" crowd and how it will affect the economy. This hits semi-personally as my significant other is looking to transition into a more home-based business type way of generating money.

[FRED]

Re: Mortgage Swamp

Dear Fred:

Thank you very much for a detailed and cogent analysis.

However................

One important thing seems to be missing..............

This isn't just any old 10 year period in which to experience a bear market
in housing, no sir !

This is the period in which the baby boomer generation retires......

Demographically, this generation will want to downsize their homes, sell them to buy yachts, or condos in St. Maarten, or burial plots...

I remember reading elsewhere.... in a galaxy long ago..... and far, far, away....

THAT...

The boomer retirement demographics alone.... were sufficient to create a housing recession..........

Your view??????

INDY

Several factors are working against single family suburban homes:

1) Rising energy and commuting costs will push down the prices of homes located more than 30 min. from regional job centers
2) Aging demographics is causing a migration north to south
3) Aging demographics will cause a shift out of homes and into condos near or in cities

One mitigating factor is the work-at-home trend that will reduce the frequency and cost of commuting.

[goprisko]

Re: Mortgage Swamp

Dear Fred:

Thank you very much for a detailed and cogent analysis.

However................

One important thing seems to be missing..............

This isn't just any old 10 year period in which to experience a bear market
in housing, no sir !

This is the period in which the baby boomer generation retires......

Demographically, this generation will want to downsize their homes, sell them to buy yachts, or condos in St. Maarten, or burial plots...

I remember reading elsewhere.... in a galaxy long ago..... and far, far, away....

THAT...

The boomer retirement demographics alone.... were sufficient to create a housing recession..........

Your view??????

INDY

[Rajiv]

Re: Mortgage Swamp

Good article "Foreclosures Up 90% From Last Year - Winners and Losers in the Housing Market Crash"

In a quarterly conference call yesterday reported by The New York Times, JP Morgan CEO Jamie Dimon referred to the current business climate as "a relatively benign point in the credit cycle."

The market judged the company differently, sending share prices 3 percent lower by the end of the trading day.

Market jitters and JP Morgan's comments are relative to the subprime mortgage meltdown.

In recent weeks, Wall Street's biggest players have all stuck to the same pitch: that the subprime mortgage mess is "contained".

It is about as contained as inflation. You remember inflation? That's the index that omits food and energy prices because American consumers don't drive cars or eat.

Who would omit the price of food or energy from a core index? Clearly, someone or ones who want Americans to believe the cost of living is nothing compared to the benefits of democracy.

That's how the meaningful is turned to meaning-less.

Along the same lines, today Federal Reserve Chair Ben Bernanke told Congress in his mid-year economic report that he thought "the demand for housing would stabilize "soon".

Understand, though, that the charade that passes for current thinking on the economy in Senate or House subcommittee hearings is stage-managed by well-educated and well-compensated types who know perfectly well how poorly the broad stock market indexes have performed in relation to inflation.

And they read the papers and the blogs: consumer confidence is down, homebuilders confidence is plummeting, and public corporations, like Pulte Homes in yesterday's announcement, are hemorraging value.

Behind closed doors, including the doors of the Federal Reserve, one must infer that the dialogue is of a substantially different character. These knife-blade conversations do not show up in print.

[bill]

Re: Mortgage Swamp

http://www.lvrj.com/business/8516877.html

Real estate consultant John Burns said home prices in Las Vegas need to drop by 33 percent, or about $100,000, before the market returns to normal conditions. He shows the housing cost-to-income ratio at 50 percent, meaning people spend half their income on housing. Reno is the same.
The national average is around 30 percent.

Information on housing:http://housingdoom.com/

[bill]

Re: Mortgage Swamp

Please China we are begging you to buy more Mortgage Securities.

http://www.bloomberg.com/apps/news?p...sDw&refer=asia

July 13 (Bloomberg) -- The U.S. is urging China's central bank to buy more mortgage-backed securities after a surge in defaults by risky borrowers in the world's largest economy eroded demand for such instruments.

[Rajiv]

Re: Mortgage Swamp

Scary video!!

The relevant graph is here, and very educational



and the projected bust

[bill]

Re: Mortgage Swamp

Video: US Home prices adjusted for inflation plotted as a roller coaster:

http://video.google.com/videoplay?do...arch&plindex=0

[lethal]

Re: Mortgage Swamp

bill, Fred, c1ue, all good info, thanks. So a recession starting late this year, that gets progressively worse as defaults grow and hedge funds stumble and everything keeps building upon itself.

There's still talk out there that the stock market tends to do well in election years. Could that still be a possibility in the midst of such a recession?

My personal take on this has been to expect a relatively mild recession late this year, followed by a weak recovery next year, then followed by a serious crash say 2009 or so. But I'm just an armchair economist, so I trust iTulip analysis and forecasts more than my own.

The 'Powers that Be' are going to resist this sequence of events, adjusting the figures (Inflation, Employment, etc) and priming the economy for as long as humanly possible.

My understanding is that with the 2008 Elections, the government and the President go into caretaker mode.

Q: Will this impact their ability to 'manipulate' the economy?

If so, will all of the manipulation and deception stop?

With the amount of pressure built up underneath the deception, how long will it take to reflect in the economy (explode)?

Q: Will the US support the Dollar at current levels?

[bill]

Re: Mortgage Swamp

c1ue, good catch.

Recall the first Jim Finkel interview in early March? He said a national housing price decline > 14% over 3 - 5 years meant that everything was priced wrong, including AAA.

Asia Times:http://www.atimes.com/atimes/Global_.../IG14Dj01.html

Why did the rating agencies rate the way they did?

However, there are two immediate problems with this. First, ratings are paid for by the people issuing the bonds mentioned above, not the people buying them. Thus there is a logical business reason for maintaining the rating at a higher level than is strictly warranted by fundamentals. This is called a conflict of interest.

The second problem is that ratings are merely opinions. It is a bit like a film reviewer saying that the latest Bruce Willis movie is fantastic, while it may well turn out to be a stinker for most people. The difference, of course, is that a bad film recommendation only costs you US$10 (less if you buy a pirated disc in Shenzhen), but a bad ratings opinion can cost you millions. The agencies, while sophisticated, do not know the future any more than the typical astrologer. They therefore use masses of data to justify their opinions, all the while employing analysis of historical information.

Why did the rating agencies wait so long to downgrade?

This week
What happened this week was a result of the prices of mortgage securities falling sharply in the past few weeks. Finally on Wednesday, the rating agencies moved to cut ratings of more than $12 billion worth of bonds. This forced the "hogs" mentioned above to sell their bonds into a market that was already nervous about further weakness in the US economy.

The result was, of course, carnage. Being unable to sell all the securities they had, many of the investors had to sell other securities, including corporate bonds hitherto unaffected by the rating moves.

The immediate question arising from the rating agencies' action focuses on timing. Why did they downgrade this week, based on information that had been available since February? The reason, of course, goes back to the conflict of interest - if agencies admitted that their ratings criteria were wrong, they would lose a lot of business. Indeed, financial newspapers have been pointing out over the past few weeks that smart investors such as hedge funds have been "short" the stock of rating agencies (or their holding companies) for precisely this reason.

As alluded to above, we can see that the extra time gave the big investment banks the opportunity to get rid of their existing positions, most often to big central banks around the world. We will know how much these banks lost, especially in Asia, only over the next few years rather than weeks.

Who gets burned as a result from all these miscalculations done by the rating companies?

Next steps
The subprime banana skin has thus claimed a number of victims, including Asian central banks that are forced to hold billions in US dollar securities because of their currency manipulation that pushes up reserves. It almost seems poetic justice that the manipulators are given losses by the very people they think they are helping, namely over-consuming Americans.

I believe that forced liquidation of many portfolios in Asia will create further losses, but American borrowers will emerge in essence unscathed from all this. Holders of mortgage securities do not have any claim on the underlying assets, only on the intermediate companies, which will of course declare bankruptcy, thus leaving empty shells for lenders to pursue. Unlike in previous crises such as that involving the telecom sector in 2002, most of the losses will be absorbed by central banks around the world rather than North American or European commercial and investment banks.

This is one of the greatest robberies of our time, and it will go unreported in essence. Hard-working Asian savers will see their central banks post billions of dollars in losses on the US mortgage crisis in the next few years, but nothing can be done about it given the general lack of accountability across Asia.

[c1ue]

Re: Mortgage Swamp

This is why I learned very early in life to never bet against the house. You can hedge against the house or insure yourself against the house, but betting against it is a game i'm not willing to play.

Luckily there is more than 1 house to bet on/against.

The US economy as a share of the global economy is still large, but shrinking.

As with any stock/bond - the future trend rates will factor heavily into present prices.

Sometimes the only way to play is play somewhere else - that's my strategy.

[bart]

Re: Mortgage Swamp

This is why I learned very early in life to never bet against the house. You can hedge against the house or insure yourself against the house, but betting against it is a game i'm not willing to play.

Indeed... and just finding out how to monitor the house to know what they're betting on is less than simple.

“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
-- Benjamin Graham

[DemonD]

Re: Mortgage Swamp

Same here - *sigh*

For what its worth, another TIO ("hot money" injection) operation from the Treasury appears to have started today with $13 billion. Over 95% of these in the last year have resulted in up markets.

This is why I learned very early in life to never bet against the house. You can hedge against the house or insure yourself against the house, but betting against it is a game i'm not willing to play.

[bart]

Re: Mortgage Swamp

The biggest errors iTulip has made in the past is not in predicting recessions but underestimating the willingness and capacity of the Fed and Congress to fight them once they get underway. Problem is, no two cycles are the same, and we are starting out from an extraordinarily bizarre place.

Same here - *sigh*

For what its worth, another TIO ("hot money" injection) operation from the Treasury appears to have started today with $13 billion. Over 95% of these in the last year have resulted in up markets.