Monetary Policy

Two More Years of Pain

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Resets, nothing but resets in 2010.

Amherst Securities senior analyst Laurie Goodman, last seen in these parts disproving the link between unemployment and defaults, has some discoveries on adjustable rate mortgages (ARMs) that Calculated Risk helpfully summarizes:

• Option ARM borrowers were a self selecting group: "option ARMs were the ultimate the ultimate affordability product, and borrowers who took them were a self-selected group."

• Option ARMs have performed almost as poorly as subprime: "The cumulative default rate on option ARMs is higher than on any other category of loans except subprime. For 2006 securitized issuance, 61% of subprime loans have defaulted, as have 49% of the option ARMs, 39% of Alt-A loans, and 11% of prime loans."

• Option ARMs are no longer experiencing negative amortization (this is because of the low index rates, and the annual increase in the payment.)

• The two key problems for option ARMs are negative equity and the coming recasts (with payment shock). "Across all categories, option ARMs have more negative equity than other products." and "most of subprime pay shocks have already occurred, while most of the options ARM pay shocks are yet to come."

The scoops are on their way! I repeat, the scoops are on their way!

Take another gander at that graph up top and you can understand why nobody at Fed, Treasury or the destination media is willing to reply to the question of whether the recovery will not fail to decline to refuse to avoid kicking in this year with anything bolder than a definite maybe.

That looks to me like a lotta houses coming on to a market where demand has been pretty well tamed. And there is reason to expect interest rates will be increasing during the peak period for readjustments—which, barring magical government interference, will mean fewer buyers and more desperate sellers.

Household net worth hit a floor in the middle of 2009 of about $53 trillion. That's between $12 trillion and $14 trillion down from the 2007 peak, and according to back issues of the Fed's Flow of Funds reports, it puts us about where we were in 2003/2004. Stock market performance was the main support for last year's plateau. It's breathtaking: After a year in which the monetary base has been inflated faster than at any point in my lifetime, there still doesn't seem to be any scenario in which the American asset base can escape further deflation. We have such a strong, deep bench of deadbeats ready to take the field for at least the next two years, the rest of the world can only look on in wonder.

NEXT: A Tale of Two Taxes

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  1. Guns, ammo, and alcohol. Any other investment is foolish.

    1. Don’t forget Bacon!

      1. Can’t you get bacon if you have guns and ammo?

        1. Guns, Ammo, Alcohol and Gold.

          Oh, and Bacon – you can NEVER go wrong with bacon.

          1. You know, they do make canned bacon….
            http://www.avclub.com/articles…..-ful,2481/

          2. What? I would think an Old Mexican would be more keen on having tortillas with his beans, not bacon.

            Tell us the truth, you’re not really an Old Mexican, you’re just a Food Channel Mexican, aren’t you?

      2. Gotta have the TacBac.
        http://cmmginc.secure-mall.com…..mp;cat=172

    2. Don’t forget gold! Precious, precious GOLD.

    3. and porn, porn will be as good as gold in a post apocalyptic world

    4. Actually, once Western Civilization is destroyed by Greenspanomics and Obamanomics, the only two sure-thing businesses will be Food and Women, because everybody has to eat, and because women are the business.

    5. Beans, bullion and bullets.

  2. Stupid government interference here is virtually axiomatic, but it’s likely that not even throwing another trillion clams into the maw of this monster will make a difference. The market is going to have to clear one day, and delaying that day only makes it more painful.

    I’ll add real estate to Naga’s list…there are going to be some good buys soon.

    1. Jeff,
      You said it. I own a mortgage origination company that started building out a specialty servicer (a mortgage servicer with a much higher ratio of employees to servicing assets designed to service subprime loans) in 2008. The business plan was to work with hedge funds and other distressed asset buyers who acquired the loans at steep discounts and work to monetize those assets (refi as many as possible which usually results in cutting the homeowners principal balance, modifying loans and foreclosing).

      The market frooze up the minute TARP was announced and 2009 turned out to be a year where very few distressed loans were traded.

    2. What type of real estate? Oversized McMansions on 1/4 acre lots that are so close to each other that if you stand naked in front of an open window and get a hard-on, the tip of your dick will be touching the neighbor’s house, or undeveloped land?

      1. What type of real estate? Oversized McMansions on 1/4 acre lots that are so close to each other that if you stand naked in front of an open window and get a hard-on, the tip of your dick will be touching the neighbor’s house, or undeveloped land?

        I wrote and rewrote what I thought would be a good investment….then I wrote this:

        Unless you have experience in real estate, stay out of the business.

  3. Love those scoops. Really, there should be a cop show called CSI: Soylent Green.

  4. I recently bought a house that I know is probably overpriced by 20% to its sane, rational value because I fully expect to see double digit inflation in the next 3-5 years.

    1. Really? It’s possible, I suppose, but I’m not as brave as you.

      1. You’re going to listen to someone who calls himself “Some Guy”? He could be Alan Greenspan, for christ’s sake.

    2. The problem I have with betting on hyper-inflation is I have doubts that my income will keep up with it and so won’t have the money to pay off the house even with inflated dollars. Its not like I am Goldman Sachs, TSA agents and Congressmen and have the Federal government guaranteeing my inflation adjusted income

      1. The problem I have with betting on hyper-inflation is I have doubts that my income will keep up with it and so won’t have the money to pay off the house even with inflated dollars.

        So getting a fixed rate loan is less safe in an impending inflationary market then renting?

        Last I checked rents when up in an inflationary market and loan values dropped.

    3. I hope you plan on living in that house.

      Cuz the price will drop before inflation outpaces the deflationary housing market.

  5. When has government interference ever been “barred”, magical or otherwise.

  6. Sadly I think Krugy’s original play by play of the real estate bubble is going to actuall turn out to be CRE, a slow painful bleed. Think we are out of the end of the world shocks, god I hope we are.

    I also have to give the Dr. Evil of economics credit for being one of the few that still openly proclaims there’s still la CRE bubble. (I’ll be in the shower scrubbing and crying)

  7. I recently bought a house that I know is probably overpriced by 20% to its sane, rational value because I fully expect to see double digit inflation in the next 3-5 years.

    20% is a steal. I went in at the local low, at what still seemed to me like at least 100% over “sane,” thinking prices will never be set free, so fuck it. I need somewhere to hoard things.

    In the few months since I bought, local prices have gone back up, not to full bubble level, but by more than the buyer credit and the mysterious slowness of banks to foreclose and sell explains. I assume The Plan is that however wild inflation-in-general goes, housing prices will be made to out-inflate it, for at least as long as I’m likely to live.

    So I got that goin’ for me. (The eventually not living part.)

  8. how come nobody ever complains about the government’s socialization of the housing market?

    the government is the biggest backer and buyer of mortgages — without government involvement, there is no market at the moment for new mortgage-backed securities.

    But that’s not enough, so we have endless “loan modifications,” so that people who don’t pay their bills will have lower bills.

    1. Re: Socialism Sucks,

      [H]ow come nobody ever complains about the government’s socialization of the housing market?

      Well, a few did, but the rest were bought off by the ruling class of tax consumers.

    2. ss, you must be new here.

      1. See yesterdays thread, which was all about government socializing the housing market.

  9. Strange to see so many libertarians apparently believe that the government can successfully prop up housing prices. Entrusting your fortunes to the competence and efficacy of government bureaucrats?

    They couldn’t stop inflation in the 70s and they can’t stop deflation now.

    1. Re: Graphite,

      Strange to see so many libertarians apparently believe that the government can successfully prop up housing prices.

      It seems strange to me, since there is nothing libertarian about government propping up any market.

      And you are absolutely right: The government interventions only make things worse. These “stimulus” plans are like quickly opening a hole under the guy falling with no parachute, with the assumption that as long as he does not hot the ground everything will be fine!

      By the way, once the falling guy reaches the hole, those digging will say “See? Green shoots!”

  10. Household net worth hit a floor in the middle of 2009 of about $53 trillion.

    Yeah, you go ahead and believe that . . .

    . . . I will be buying your house for pennies on the dollar.

    1. They hit a floor, not the floor.

  11. Just for once, I’d like to hear a reason to believe the world isn’t ending. Right now it seems like it’s been years.

    But I’m a picky SOB. I want a real reason.

    Why doesn’t Obama just have the Feds buy up, say, 1/3 of the currently available housing in the US? That’d solve the problem and in the long run, it’s probably cheaper than what they’ve done and will do, in the name of saving our economic asses.

    1. Would you want to live in a neighborhood where the feds owned 1/3 of the houses? Talk about shitty neighbors. F that S.

  12. The Market is a nervous jerk. Or a twitchy nerve. Or something along the lines of “overshoot and over react is the norm”.

    House values went way too high. By the time the market clears, they’ll have gone too low. Once the recovery finally starts, we might get some idea where housing prices really belong.

    At this rate I predict it’ll be a decade before that happens. Assuming Uncle Sam hasn’t succeeded in completely trashing the US monetary base by then.

    1. Assuming Uncle Sam hasn’t succeeded in completely trashing the US monetary base by then.

      Bad assumption.

      I gots to know, tho — what do you consider “completely trashing”?

      1. I didn’t say it was a good assumption.

        How to define “completely trashing the economy”? Dunno for sure. How bad is “bad enough”?

        California has to be in the zone or very near it. I figure the Fed isn’t too far behind.

  13. I agree with Tim’s evaluation, except for the part about rising interest rates.

    If real estate begins to freefall again as a result of the factors he outlines, there probably will not be a dramatic rise in interest rates, despite the way the Fed has printed money. In fact, those two events may be mutually exclusive. We can have one or the other but probably not both.

    1. If real estate begins to fall again, it makes the loan risk that much greater which is a catalyst to increasing interest rates, not a hinderance.

  14. That looks to me like a lotta houses coming on to a market where demand has been pretty well tamed. And there is reason to expect interest rates will be increasing during the peak period for readjustments — which, barring magical government interference, will mean fewer buyers and more desperate sellers.

    The bulk of those OptionARMs are in the sand states, too. So we’re going to see location location location apply to interest rates and down payment requirements, too. (We always do, but it’ll be much more pronounced until the excess supply is exhausted, which will probably take 20 or 30 years.) Followed by another wave of CRA-like activism to stop location-based risk pricing by claiming that it is discriminatory in one form or another.

    I’m expecting to see a lot of municipal downsizing ala Youngstown. A prudent lender would eventually take such downsizing into consideration and price loan risk accordingly, probably in accordance with housing insurance risk. Idiotic mayors will try to put a stop to it, which will probably mean banks voluntarily close branches, followed by state legislation to require any bank in a county to make loans, which will cause more banks to pull out of some markets not unlike insurance companies pulling out of select markets today.

    In any event, I don’t see the majority of Americans ever subjecting themselves to the law of supply and demand in my lifetime.

    1. In any event, I don’t see the majority of Americans ever subjecting themselves to the law of supply and demand in my lifetime.

      Everyone, everywhere, is subject to the law of supply and demand. Governments can cause temporary blips in its application, but cannot exempt anyone from its jurisdiction.

  15. If real estate begins to freefall again as a result of the factors he outlines, there probably will not be a dramatic rise in interest rates, despite the way the Fed has printed money. In fact, those two events may be mutually exclusive. We can have one or the other but probably not both.

    I think I disagree, Fluffy. At some point, massive increase in the dollar supply leads to inflation. Not to mention, massive increase in the amount of government debt that needs to be sold leads to an increase in the interest rate that we will need to pay to move that debt. These factors are inexorable and will drive up interest rates, regardless of what the housing market does.

    A collapsing housing market may lead to Our Masters trying to hold mortgage rates down, but you can’t have 12% inflation, 13% T-Bills, and 5% mortgages.

  16. It’s a damn good thing the Fed is independent; otherwise, 2we’d really be in trouble.

    All this new money is going to get soaked up by assets not included in “inflation”. Antique shotguns and Ferraris will go to stratospheric levels, as the “business reporters” sit around boohooing about deflation.

    1. You mean yet another bubble? No, can’t be.

      Everyone knows that properly regulated markets are immune to bubbles. Because bubbles hurt poor people and children too, and we can’t have that.

  17. The smart money won’t be buying money.

  18. Still lots of inflationist thinking being posted here. Look, that reset schedule chart Tim posted is signaling another massive deflationary wave on the way. Every dollar in an account at the big 4 banks, not to mention scads of regional banks, is backed in part by these crappy, negatively amortized loans. As soon as people figure out those aren’t going to be paid back, it vaporizes some of that IOU money outstanding and leaves the rest more valuable. And this is a story that will be repeated not only in mortgage recasts but in credit card debt, municipal and state debt, corporate debt, and even sovereign debt.

    The Fed printing $1 trillion to buy mortgage-backed securities is like whizzing in the dried bed of Lake Superior after global warming evaporates all standing water. Even if they printed new dollars to replace every bad loan in existence, it wouldn’t be inflationary, because they would simply be replacing money that people already thought they had in the first place.

    Buying a bit of precious metals to hedge against official insanity is a prudent hedge. Taking out a mortgage loan to buy overpriced, illiquid real estate because you’re convinced massive inflation is on the way is risking financial self-immolation, given the deflationary risks out there.

    1. Still lots of inflationist thinking being posted here. Look, that reset schedule chart Tim posted is signaling another massive deflationary wave on the way.

      Deflation and inflation can operate at the same time. We can have fun paying $6 for a gallon for gas because the dollar has tanked while watching our home prices being cut in half all at the same time.

  19. “Take another gander at that graph up top and you can understand why nobody at Fed, Treasury or the destination media is willing to reply to the question of whether the recovery will not fail to decline to refuse to avoid kicking in this year with anything bolder than a definite maybe.”

    Sub editor drinking much?

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  22. I think it is necessary to study the market well before starting work and not so bad and bad that women were engaged in business, because progress is not standing still.

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