Monday, March 3, 2008

Wish I had Written That!

It was 45 degrees today! Amazing stuff. This week will see reasonable temps and only rain as precipitation. Wonderful. My birthday is coming up in a couple of weeks. I kind of like birthdays, though the more you have the more they remind you how old you are of course! Was it really 1976 that I came into this world? 1970's stagflation and perhaps a repeat performance here in the 2000's, kind of creepy.

Mish Hits it Out of the Park
Sometimes you read something that conveys your exact thought or feeling about something perfectly. I found myself wishing I had written what Mish has posted today on his site. I highly recommend the entire post over at Mr. Shedlock's site tonight:
In it he savages Treasury Secretary hank Paulson's recent comments on housing and bailouts, and rightly so.

The real nugget that I like very much is the following snippet:
Morality vs. Business Decisions
In a nutshell, banks made business decisions to lend money to people to buy houses that banks knew people could not afford. Banks also made business decisions to lend with no money down. Banks knew there were risk to these strategies but they took the risks anyway. Those were bad business decision for banks. Banks, not taxpayers should pay the price. Paulson is now begging people to do something that may not be in their best interest to do. My recommendation is simple. If it benefits you to walk away, then walk away.
Note too that walking away is not one sided. Banks and businesses "walk away" all the time when it suits their best interest. Deals are being broken as I type and banks are paying breakup fees. See "Businesses Advised To Walk Away" for more on this topic. The "breakup fee" for homeowners walking away is a bad mark on their credit report and loss of their down payment. In many cases the down payment was zero. Banks have only themselves to blame for setting the breakup fee too low. Bubbles, greed, and bailouts, not walking away, are the real moral hazards. And if enough people do walk away (forced or unforced), banks will be more careful about who they lend to next time and what the breakup fees (down payments) need to be. If and when banks (and the Fed) are more careful, fewer bubbles will get blown, and the better off we all will be.
Mike "Mish" Shedlock

I think this line of thought captures what is going on right now. The banks and the smarty pants financial alchemists that manufactured the new age mortgage products made a critical error. They tried to extrapolate past trends into the future without regard for changes in perception or behavior.

As it pertains to housing, here is how I see it; In the past the amount of time, money, paperwork, and effort required to buy a home was considerable. Only qualified and committed buyers entered into mortgage contracts. These folks had the usual reasons for buying a home, and so a particular set of performance was established over time, namely foreclosure was always a last resort for whatever reasons.

Now the situation has changed. Minimal requirements for loans, 10 minute loan approvals, no money down, and an almost passive process of buying a home has allowed all kinds of people to enter into the mortgage market. When mortgages became a vehicle for home price speculation and a path towards a home ATM via refi, mortgages stopped being home loans and became personal financial tools. As Mish said, there is nothing wrong with this per say, but the issue is that the borrowers over the past boom years are not going to go out of their way to keep a home that is declining in price. The primary purpose of purchases made during the boom years was price appreciation and access to said appreciation. The "use" of the home was a money well, not an "investment". Now that the well is dry, the utility of the home has been erased. Again, like Mish says, a bad credit spot is the "breakup fee" for the business deal, and one many will gladly pay to get out from under long term debt service on a depreciating asset that now has no utility. This is the point that the powers that be simply still do not get. Absent rapid price appreciation and free and constant access to it, the purchase of a home will no longer serve many borrower needs.

This is why foreclosures are rapidly escalating. This is why people that CAN pay their mortgage are choosing NOT to pay. If you agree to my premise of the loss of utility of the home, then this all makes sense. It will also make basically all of the proposed bailout plans useless, unless they restore 10% plus price appreciation per year and right away. I am wondering when that plan will start to be circulated! Vote in the new poll on this topic.

Japan, Margin Calls, and More Losses at CFC
Last night the Japan markets took a beating that can only be termed as brutal. Thornburg Mortgage come out publicly with the information that they have missed several margin calls. Countrywide Financial releases data showing their Alt-A mortgage losses are getting worse, seemingly by the minute. All this and the markets were flat today. OK. I know I have beat it to death, but the extent and severity of the problems in the credit markets and the banks are nowhere priced into this market.

The reason I am bearish is that there is a substantial amount of market players that are trying to position themselves for a big market rally. That is not the makings of a true rebound anyway, not that fundamentally we are anywhere near a long term uptrend. Like Todd Harrison says over at Minyanville, we are near a Major Move in either direction, but the time of that move is very close at hand.

Have a good night.

1 comment:

Anonymous said...

We were 70 Saturday, 35 with snow Sunday, and about 37 and clear today, I was able to start working the ground for the garden so spring will be here in a few weeks.

I've been bearish on the market for a couple of years and took a beating on the short equity funds which I have held but they are making up for it now. I'm getting ready to dump a couple hundred oz of silver as this run up has me seeing housing bubble all over it. I'm always early when it comes to calling a top although this will more then likely just be a good correction but I got it for less then 5 bucks an oz and it is only a small amount of what I have so profit taking seems the logical step here at least for me.

My house is a utility for me as I bought it to live in, I paid cash, and I got what I considered was a good deal.