3 Days of Mayhem

My last poll which questioned whether companies would push out a bunch of bad news during this holiday shortened week has closed. All votes were for the affirmative. Hard to argue with the sane minds that read this blog, as this week was chock full of rancid news and developments. I am going to post tonight, and then probably nothing until Saturday. I will try to make it a good one.

If You Don't Like the Game, Pick up Your Ball and Go Home
A recurring theme in the mortgage market mess is that the cut rate prices that are being offered for mortgage related assets are simply wrong. The argument is that prices right now are driven by fear and irrationality, not the fundamental asset worth. Things are accelerating to such a degree, the European Covered Bond Council has suspended trading in inter-bank market-making in covered bonds until Monday, Nov. 26! Full article: http://www.reuters.com/article/bondsNews/idUSL2120255420071121?pageNumber=1&virtualBrandChannel=0&sp=true
Fun excerpts:
"The move is a sign of the stress in the covered bond market, which is dominated by German institutions that have almost a trillion euros of covered bonds outstanding."
At least they have an idea how big the market is!
"Due to general market conditions and the specific mechanics of the inter-dealer market making it even seems possible that inter-dealer market making will not be resumed this year."
In all the instances when trading of anything has been suspended, it has not been my experience that things go well when trading reopens.
"It's good for the market," said Christoph Anhamm, head of ABS and covered bond research at ABN AMRO in Frankfurt. "It gives the market time to think."
We have a winner for incredulous quote of the week, and Mr. Christoph Anhamm can collect his prize when available.
When home prices were running wild and demand for mortgage paper was sky high did anyone stop the market from going up to give the market time to think? I didn't think so. The housing bubble was inflating wildly and no one wanted to think about what the fundamental values were then, now all this drama on the way down.
Is this a big story? Sadly, I am no expert on European market dynamics, but it does seem to be a major tectonic shift. The take home point is that bankers all over the world do not like the prices that are on the table for the real estate assets they have, and in Europe they are simply taking their ball and going home until years end. Just like children.

Everyone Wants to Live in California! We have the Sun, the Sea, and Frozen Teaser Rates!
In yet another move to stem foreclosures, the rocket scientists in California have conspired with some mortgage lenders to fix adjustable rate loans at low initial rates:
California lenders agree to freeze rates
By Kevin Yamamura and Jim Wasserman - Sacramento Bee
In an unprecedented move designed to save thousands of California homeowners from foreclosure, Gov. Arnold Schwarzenegger announced a deal Tuesday with four mortgage lenders to freeze adjustable interest rates for some of the state's highest-risk borrowers.
The state's agreement with Countrywide Financial Corp., GMAC Mortgage, Litton Loan Servicing and HomeEq Servicing covers more than 25 percent of California's subprime mortgage loans, which generally involve homebuyers with weak credit and require periodic increases in payments after initial low-teaser rates.
The deal brokered by Schwarzenegger requires lenders to freeze low interest rates for subprime homeowners who reside in their property.
Once again, what do you expect from children? People in California took out risky adjustable rate loans. Those loans are resetting higher. People cannot pay. Foreclosure follows. Anything hard to follow there? Again the theme of "real estate assets are not properly valued" comes up. The market has turned and will no longer support ever rising property values. People that had bet that prices would rise forever are now in trouble. Instead of a day of reckoning however, we get a plan to delay the price discovery of both the homes and the loans as far out as 5 years! I guess it is different in California!
In a related news item, the same lenders above are working to find ways to keep "homeowners" from facing foreclosure through loan modifications: http://today.reuters.com/news/articleinvesting.aspx?type=bondsNews&storyID=2007-11-21T015013Z_01_N20634427_RTRIDST_0_MORTGAGES-CALIFORNIA.XML
The lenders must try and figure out who can pay what and for how long. Never mind the logistics of trying to modify loans that have been sliced and diced and sold all over the world. The problems assocaited with such silliniess are too many to mention, but there are two major problems that I think have not been considered:

• Fixed Teaser Rate Price Equals Fixed Regular Rate Price- If Joe Smith is a trouble homeowner and has his rate set at 3% for a $300k home, he is paying $900 for his mortgage. Along comes a new buyer, Joe Jones, with strong credit, some cash to put down, and full documentation for the new loan. His new fixed rate is 6.5%. For the $300k home his mortgage will be $1950! For the same home?! Now what fool is going to line up for that deal? At a 6.5% rate, Joe Jones should not pay any more than $150k for the home, so that the mortgages equal out. So if people can use their head in California (a BIG if) price reductions should be 50% instantaneously. So much for saving housing.
• The FED Will Have to Make up the Difference Twice?-Now if you believe that these loans can in some way be reworked, there must be a horrendous loss for the banks somewhere in the process. We, being adults, know that those losses will probably be paid for by the US government through seen and unseen channels. My question is now this: Seeing that the US taxpayer is already footing the bill for the mortgage bailout, will the "homeowners" that stay with their new low fixed teaser rate still be granted the mortgage interest tax deduction? It would seem to me to be a double bailout on the taxpayer bill to first give cash to struggling banks that lost money due to foolish loans, and then give a nice tax break to the same people that took out those loans! The interest rate deduction must be withdrawn from any household using this bailout process.

I have a new poll which asks the question about the tax break withdrawal, please vote!

There has been a deluge of news this week, and I encourage everyone to spend a little of your time off this week sifting through the news. Just a little though, financial concerns should not be your focus as we start the holiday season. I would direct your attention to good food, frosty alcoholic beverage of your choice, and sports.

A note of thanks to all readers of this blog. I appreciate all the comments that are left. I am glad that some of the garbage I write resonates and helps people think about what is going on in the financial world. Come by often!

Have a nice Holiday, and as always, a good night!