[mike777]

Moody's and S&P and Fitch are in the Bond rating business. These are huge ratings firms with PHd guys and lifers who all day long rate bonds.

They decided 6 years ago that if you:
1) buy a house and get a mortgage
2) then get a second mortgage for your downpayment(you have zero equity or cash put into the house)
3) you are not more likely to default or walk away from your house with negative equity.
4) They recently reversed themselves on this issue...


Other experts who actually bought these mortgage and put their money where their mouth is did not disagree.

Hence we now have a credit crises.

[jtfanclub]

Here's my question...should we bail out Countrywide if they look like they're going to go belly-up?

http://cbs3.com/busi..._228085908.html

Mortgages are a commodity. If Countrywide goes under, they'll have a fire sale of their existing mortgages. Banks and investors will have no reason to offer/buy new mortgages with all sorts of cheap existing mortgages out there. Which means nobody able to buy houses on credit. Which means housing prices plummet. Which in turn will freak out the real estate market even more (nobody wants to offer a mortgage in a declining real estate market). The spiral could be devastating.

We'd be talking an unsecured low interest loan to Countrywide, with a very generous repayment plan. Probably on a ten to fifty billion dollar scale. The U.S. Government could afford it.

The question is, should we?

[keylime]

The question should be, can we NOT afford to.

There is a sizable reassessment going on with regards to risk. If we fail to bail out Countrywide, it would not take a lot of effort to jump to the conclusion that the repossessions will be based on some flimsy excuse like "eminent domain" and now the owners are out of a house.

I do not think there is going to be a large correction here (and I have it on good authority - one of my coworkers is our chief economist and he does the TV rounds and such). I do tho think there is going to be a realignment of maybe a quarter or a half of trillion dollars in the U.S. market when it's all said and done. Furthermore, I wouldn't be surprised if credit unions will use this to pressure Congress even more to pass the CURIA piece of legislation, in concert with starting the North American phase of microlending and microcredit.

[pbleighton]

Quote

Moody's and S&P and Fitch are in the Bond rating business. These are huge ratings firms with PHd guys and lifers who all day long rate bonds.

They decided 6 years ago that if you:
1) buy a house and get a mortgage
2) then get a second mortgage for your downpayment(you have zero equity or cash put into the house)
3) you are not more likely to default or walk away from your house with negative equity.
4) They recently reversed themselves on this issue...


Other experts who actually bought these mortgage and put their money where their mouth is did not disagree.

Hence we now have a credit crises.

True, but incomplete.

Over the last 10-15 years, we've also had:
1. A slide in ratios (basically, how much income do you need to buy a house of a given value - now you need less).
2. The percentage of down payments has gone down. 20% used to be the norm, now 10% or less is common.
3. The proliferation of no income verification loans (you just state what you earn, you don't have to document it), mostly used by the owners of very small businesses who cheat on their taxes. The laxity in these loans (restricted to borrowers with excellent credit) has spread to"standard" loans. Inernet underwriting has caused some big losses.
4. Appraisers' standards (is the house worth what is proposed to be paid) have been slipping badly, under pressure from the mortgage brokers - give me a good appraisal if you want to get more of my business.
5. The proliferation of adjustable rate mortgages, which are fine in themselves for individual borrowers, but which may create a huge problem if we encounter a recession and even slighly higher interest rates simultaneously - in my freshman economics textbook this was impossible (in 1973), but then I read the papers...

All of the above, but especially #5, creates the potential for the next recession to be really terrible.

Peter

[mike777]

No we should not.....the real problem for these mortgage companies is liquidity. The cannot borrow at low rates of interest to fund new mortgages.

BTW I strongly disagree in saying mortgages are commodities. They are just about the opposite of that.

[pbleighton]

I would strongly prefer that we don't bail out Countrywide. We may have no choice.

Peter

[mike777]

If big companies think they are too big to fail, then they will continue to make bad loans or take on too much risk, since they can shift the risk to the government.

Example...a complete stranger asks to borrow 800,000$ from you...you say sure..if you default .....the rest of the USA taxpayers will bail me out...no risk.

[mike777]

Keep in mind what it means if Countrywide goes bankrupt.
1) They may still be in business even if bankrupt
2) Someone comes in and buys the company for a song....shareholders hurt, not us.
3) Countrywide, sells its assets for a song, good for us buyers...buy low , sell high, etc.
4) New companies step into the breach and become the new countrywide in a few years
5) Countrywide does not pay its bills, companies get punished for lending to countrywide..so? They seize assets and the collateral. That is why they have it.

6) etc.

one million dollar 800 square foot homes...suddenly become worth only $500,000 800 square foot homes..this is a good thing .

[jtfanclub]

mike777, on Aug 16 2007, 02:59 PM, said:

3) Countrywide, sells its assets for a song, good for us buyers...buy low , sell high, etc.
............
one million dollar 800 square foot homes...suddenly become worth only $500,000 800 square foot homes..this is a good thing .

Both of these would be enormously destructive in the short term...millions of people would suddenly find themselves overextended and probably end up bankrupt. Long term, a correction would probably be beneficial, but...

[mike777]

Lets start with the agreement that millions and millions of people are overextended, today, right now. Let's agree that applies to businesses too...

So none of this is anything new.

Creative destruction does cause real pain to real people including us.
There is some evil in the capital market system.
Just a question of how much of a nanny state we want.

Please do not read into any of this that I think a correction is a good thing. What I do think a good thing is the fed providing some level of liquidity and the government not bailing out the rest.

Rothchild's were famous for lending when no one else would and not lending when everyone else would.

Someone smart will step in and provide mortgage loans at the right price.
If that means those silly Calif housing prices crash...too bad.

[hrothgar]

I think that its useful to distinquish between two different types of actions:

1. Bailing out a specific home mortage company like Countrywide.

2. Having the central banks provide some additional liquidity to stop the entire system from imploding.

In general, I have big issues with case 1 and many less problems with case 2.

I'm really sorry that lots of folks are going to get screwed over because the houseing bubble popped. At the same time, i think that it was perfectly obvious that there was a housing bubble going on.

You don't get to gamble trying to time a bubble and then start crying when you get when the bubble pops and you're stuck holding a jumbo mortage secured by an over-valued house.

Sadly, the lessons on 1991 are forgotten by the "adults" of 1995. (What's really sad is that no one seemed to learn from the telecom bubble)

[jtfanclub]

hrothgar, on Aug 16 2007, 03:54 PM, said:

I think that its useful to distinquish between two different types of actions:

1. Bailing out a specific home mortage company like Countrywide.

2. Having the central banks provide some additional liquidity to stop the entire system from imploding.

In general, I have big issues with case 1 and many less problems with case 2.

The thing is, #1 is cheap. In fact, it may end up costing us next to nothing (delayed low interest loans can in theory get paid off fast enough to not cost much, cf. Chrysler). #2 is hideously expensive. $20 billion in guaranteed loans would keep Countrywide floating forever. $20 billion in Treasury buybacks isn't even a blip on the radar.

Quote

I'm really sorry that lots of folks are going to get screwed over because the houseing bubble popped.  At the same time, i think that it was perfectly obvious that there was a housing bubble going on.

Agreed.

Quote

You don't get to gamble trying to time a bubble and then start crying when you get when the bubble pops and you're stuck holding a jumbo mortage secured by an over-valued house. 

But those are the people who are getting screwed now. The people who will get screwed if Countrywide goes down are mainly people with existing mortgages who bought before the bubble and took out home equity loans. When people can't get new mortgages at a reasonable rate, home prices will plummet. The amount that you can take on home equity loans is based on the equity on your house. Even a small drop in the price of a home can make a big % difference on your equity. People with excellent credit are suddenly going to find themselves cut off, forced to take either unsecured loans at a ridiculous rate or collapse into bankruptcy.

It's not going to affect me directly at all...in fact, I may be able to get a house at a third of its current rate in a few years. It will probably bankrupt my parents, as they have a home equity loan that's almost equal to the value of the house. Good luck paying that off if they call it in.

[mike777]

I doubt many home equity loans are callable upon demand. That would be very rare. Also most variable rates have caps on them.

In general if you can pay off your loans this is good news since in short time...months? rates will come down and you can refi at a even lower rate.

If someone has drained all the equity or almost all the equity out of their homes..and then spent that equity..I have no general sympathy.

[mike777]

btw the market rallied 350 points or so today..Fed injected 17 billion just today into economy....a good start.

[Winstonm]

There is even more to the ratings agency story, Mike. Moody's, Fitch, S&P, etc. not only rated the CDOs but also helped put them together and charged more for doing so. Then the capper is they used the same ratings terms as they used on corporate debt - assigning for example AAA to the top tranch of the CDO.

[Winstonm]

mike777, on Aug 16 2007, 05:12 PM, said:

btw the market rallied 350 points or so today..Fed injected 17 billion just today into economy....a good start.

The Fed is not "injecting" into the economy. The Fed is using repurchase agreements - repos for short. The object is to infuse capital into the markets in return for collateral - short term loans to banks to solve temporary liquidity problems. When the repurchase expires, the banks must pay back the loans plus interest.

[mike777]

Whatever they did.....people who buy billions and billions of these things knew it. I hope no is suggesting fraud.

You buy billions of stuff you better now what you are buying, or no crying in bondball

[mike777]

The fed can inject money by simple buying treasuries outright...this is different from repos.

[Winstonm]

mike777, on Aug 16 2007, 02:50 PM, said:

No we should not.....the real problem for these mortgage companies is liquidity. The cannot borrow at low rates of interest to fund new mortgages.

BTW I strongly disagree in saying mortgages are commodities. They are just about the opposite of that.

Quote

No we should not.....the real problem for these mortgage companies is liquidity. The cannot borrow at low rates of interest to fund new mortgages.

Not exactly correct. The Fed target rate has not changed so the cost of borrowing from the Fed is the same. The problem is there are no buyers for the MBS (mortgage backed securities). Banks and mortgage companies for the past 4-5 years have not actually been the lender - they have not held the loans. The made the mortage then sold these mortgages to other entities who bundled them together into RMBS (residential mortgage backed securities) and then sold those RMBS.

The reason home loans are so hard to get is that now banks and mortgage companies have to hold their own loans - they can't pass off the risk - the market for the RMBS has gone kaput.

[mike777]

Winston...mortgage companies do not borrow from the fed to fund their operations, fund rate is not an issue here.

Real rates are, not government set rates..in the real world.

To be fair these news reports that say MBS have no market is of course nonsense...someone will buy this stuff, it is just a matter of price.

Sort of like when people tell me they cannot sell their house,,nonsense..I say here is one dollar..SOLD!

Yes too your second point, as I said no liquidity.....