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Thursday, August 02, 2007


The newfangled portion of the mortgage market (really of just a few year's vintage, but taking more than half of the market recently) was driven by non-traditional mortgages which were funded in the interim by the big boys, and then securitized and sold to largely institutional investors. The commercial RE market was nearly as bad, and in some cases worse.

Of course this corresponds to some categories of corporate debt, the market for which is locking up quite quickly.

The IMBReport carries this statement from the CEO of IndyMac, saying in part:
...the private secondary markets (excluding the GSEs and Ginnie Mae) continue to remain very panicked and illiquid. By way of example, it is currently difficult, at present, to trade even the AAA bond on any private MBS transaction. In addition, to give you an idea as to how unprecedented this market has become…I received a call from U.S. Senator Dodd this morning who seeking an understanding of “what is really going on and how can I and Congress help?” I also have talked to the Chairman of Fannie Mae this morning and have traded calls with the Chairman of Freddie Mac (Fannie Mae’s Chairman telling me that they are “prepared to step up and help the industry”).
There continues to be excellent coverage over at Calculated Risk. They are currently discussing what seems to be a major backpeddling in Alt-A mortgages. These mortgages often contain high-risk features which may now be unprofitable, and if they go, it will force the housing market in some of the higher-priced areas down another notch.

The bottom line is that the crack in CMBX, CDS and ABX means that loans in the pipelines may have no homes, or may find them only at a loss.

A German bailout of IKB is underway; one of the big German players apparently pulled its credit line. The problem there was ABS (asset backed securities). The Bloomberg article is probably the best English coverage. The meltdown in various commercial and residential ABS indices means very large losses, which will hit first the players (those who had loans in the pipeline), and then the investors in these vehicles.

Accredited Home Lenders filed with the SEC this morning saying it may go bust. This is a different company than American Home Mortgage, which did a New Century in the markets earlier after losing its lines of credit.

It's hard to know exactly how much money is involved, but it is well over 1 trillion. There is a lot of residual value here, but right now, who can figure out what it's worth while the landslide is going on? This is an old-fashioned panic, and it will have massive implications for housing and for commercial construction.

I realize that this must seem opaque to people who don't work in the industry. The magnitude of what is going on makes LTCM look like a scratch on a fender in comparison to a vehicle that had a front-end collision with a truck.

The GSEs had been buying this paper until quite recently, so I am sure they will be happy to do whatever they can. They are bagholders too, and some of the mortgages that FNMA writes are Alt-A as well. There is no segment of MBS which will be unaffected by recent events.

At this stage, many pending home sales will not go through because of funding problems. Residential mortgage standards had already tightened somewhat, but commercial RE lending had not had the first rein-in, and a tremendous shock to the industry will roll through the system in the next couple of months.

The insane nonsense couldn't go on forever I suppose... good thing the economy isn't being affected.
Well, it was boosted on the way up and it is being dragged down now.

But I guess we have to wait to find out the net result.
Wasn't the restriction in credit a prime cause in the Great Depression?

I know the company I work for has changed its collection dates to shut down service if more than 28 days past due (previously set at 60). And I regularly talk to folks who are doing the credit card shuffle to find one that works. I expect to see more of the same. I'm wondering if we have a year before we start to see major pain in the economy.
Teri, yes, it was.

For instance, the Germans made some reference to preventing the "worst banking crisis since 1931" when they bailed out IKB.

We know enough to be sure that this will impact the economy. The question really is how overloaded with debt the consumers are. Can they cut back and recover relatively quickly, or will they have to pull the reins in tight for a long time?

Despite all the reports, no one really knows the answers to that question.

I have noticed that everyone seems to be stepping up collection efforts, banks included. The significance of about the last three weeks is that a huge number of institutions and investors just got a margin call of sorts. The effective money supply was just reduced by a non-trivial amount.
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