Edward Charles Ponzi Jr. on the Dukes of Moral Hazard
Edward Charles Ponzi Jr. sends along a post:
Dukes of Moral Hazard:
The markets are currently having a problem swallowing and digesting some of the pre-packaged “asset backed” mortgage bundles Wall St. has been manufacturing. Currently the “sub-prime” and “Alt-A” mortgages are having their risks “re-priced”.
“Re-Pricing Risk” means more expensive mortgages — and even if the buyers of these securities feel OK about the prime borrowers ability to pay — there is still the sticky issue of asset-deflation. The underlying collateral is falling in price. What was a nice tail-wind for this asset class is now going the other way. The more RE declines in value — the harder it will be to securitize, package and re-sell mortgages. High rates will have to be offered to attract buyers of the mortgage debt. Meanwhile — back at the ranch — a whole bunch of ARMs are resetting to a new higher number (way higher?) — that will create more sellers and further tilt the buyer-seller imbalance.
I believe that more than half (two-thirds?) of all mortgages are ultimately securitized – (CDO/MBS) meaning investors must be lined-up or the loans cannot be made.
So what happens to the remaining “good risks” who wish to buy homes? How much will concerns about RE prices (underlying collateral) damage the housing market and create a spiral of falling prices and hesitant mortgage issuers. At its peak residential RE was about 2x the 100-year average price (CPI adjusted [Schiller]). On top of that residential owners equity is way down (despite sharply rising prices) to about 50%. If RE corrects by half (essentially returning to “mean”) – aggregate owners equity might equal around zero. Equity withdrawals and re-fi loans may get quite scarce – with only bargain hunters with solid credit on the buy-side.
How will this play out? We already have a collapsing RE bubble – worse in some places than others – but compounding the asset bubble with mortgage difficulties may prevent markets from clearing. What happens when only “Prime” borrowers with nice down payments can get mortgages? What happens if ARMs ratchet up and people cannot re-fi? Ready for a Mortgage Strike in your town? How about Joe Consumer? What happens to our borrow-and-spend economy when people can’t do either?
Never mind the Stock Market.
This one was by Edward Charles Ponzi Jr.