What are You Interested In?
As a scientist I tend to think in structured facts and rely on hard data to form opinions. My writing here over the years I think reflects this. In any experiment you need to limit the variable and simplify where possible to get the best information. Perhaps that way of thinking does not work so well in a system like economics which relies heavily on several variables that are purely psychological in nature. You cannot model a mindset no matter how many times people will try.
The example I will use tonight is the "recovery" in housing and how this feeds into the banking system renaissance. Have the underlying structural issues been resolved and a workable base been established?
The bull case says yes very loud. You can read about it everywhere.
Last night I wrote that not much has changed in a year for the banking system, only that the attention paid to issues has gone away. Am I wrong? Am I a perennial downer?
Market Ticker pulls up a long list of RMBS loans initiated in the 2006-2007 time frame form such winners as Countrywide Financial (Now Bank of America) and JP Morgan. Here is the post and the table:
A Random Look at RMBS and the Economy
The post shows a pretty bad lot of loans with many holding 60 plus day delinquencies at over 40%.
Folks, this is endemic through the financial system. The best performing issue in that list has a 60% delinquency rate of 35.8% and a material number of them have more than half the loans in hard default.
Every home equity line behind an underwater first that is also not being paid is worth zero. There is no recovery. This is not like most bonds, where there is a meaningful recovery percentage after the default happens. This is subordinated debt that is worth exactly bupkis if the senior lien cannot be fully satisfied from a foreclosure on the property.
These bonds are literally everywhere. They're in pension funds. They're on bank balance sheets. They're held by The Fed through the garbage Fannie and Freddie paper they bought. Foreign governments and foreign banks hold them.
Yet we have banks that are carrying very similar portfolios of loans on their books - second liens, either home equity or "silent seconds" used to get around various ratio requirements such as PMI on loan origination, and essentially none of them are being carried at anywhere close to these levels of loss.
So that guy is crazy you say?
Diana Olick of CNBC is pretty level headed and maybe the best reporter CNBC has. In her post Mortgage Principal Writedown Won't Save Housing Mrs. Olick notes the following:
I agree and disagree with that statement: I agree that temporary modifications (even though the Treasury calls them permanent) are going to keep some borrowers in their homes for a while, but are really just prolonging the agony. I disagree that principal reductions will create truly sustainable mortgages.
The problem is prices. Home prices have fallen so far in the hardest hit areas, the areas where the bulk of the troubled loans are, that banks would have to write down principal 30 to 50 percent to put borrowers back in the green. Accounting rules require that banks write down the value of those loans on their books, and experts tell me that if banks really accounted for all the losses in the home loan market, they'd all be insolvent.
Another crazy person.
These data points explain the following:
-Banks are super slow to start foreclosures to limit the pain on their books which would be triggered by proceeding. As of now foreclosures ar at all time highs even with the banks dragging their feet.
-The "hold until it's par" plan which is government policy assumes these things are coming back near par at some point. If soon the banks will hold the loans, if not soon the FED will hold them.
Bad debts piled up and crippled the credit markets last year. What has changed other than nobody talks about it anymore? While I could perhaps be swayed that the FED/Treasury needed to step in and do something, I fail to see how cooking books and colluding with banks to play games fits the bill. But I am so negative.
Have a good night.