MaxedOutMama
Tuesday, October 30, 2007
Federal Home Loan System
Those worrying about bailouts ought to be paying attention to this:
Because the spreads in the commercial paper market have stabilized, most of the institutions that were borrowing will be less likely to do so, but my guess is that the most-impacted will continue. It makes me wonder. The converse to this risk is that having the FHLB system does work to prevent shocks from becoming downward spirals for the entire system.
Even the expectation of the next Fed cut has worked wonders on the CP market for financials:
The 3-5 month worry is that A2/P2 nonfinancial debt.
Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest.The concern here is that as the AAA rated collateral gets cut, some of the institutions who have borrowed will find themselves in a bind. I believe the current ABX swings are overstatements of eventual losses, but if I am wrong, there is a potential squeeze on the members of the Federal Home Loan system.
To meet the sudden demand, the institutions sold $143 billion of short-term debt in August and September, according to the FHLBs' Office of Finance. The sales pushed outstanding debt up 21 percent to a record $1.15 trillion, an amount that may become a burden to U.S. taxpayers because almost half comes due before 2009.
...
Federal Home Loan Bank obligations, when combined with the $1.5 trillion debt and $4.7 trillion in bond guarantees of Washington-based Fannie Mae and Freddie Mac in McLean, Virginia, are 46 percent more than the $5.04 trillion of Treasury debt held by the public.
Because the spreads in the commercial paper market have stabilized, most of the institutions that were borrowing will be less likely to do so, but my guess is that the most-impacted will continue. It makes me wonder. The converse to this risk is that having the FHLB system does work to prevent shocks from becoming downward spirals for the entire system.
Even the expectation of the next Fed cut has worked wonders on the CP market for financials:
The 3-5 month worry is that A2/P2 nonfinancial debt.
Comments:
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MoM,
Its possible the ABX swings are overshots (35% loss ratios?). But if they are, they're likely indicative of forced selling or hedging. Irrational overshoots are highly probably in this environment, and they tend to feed vicious circles of more sellings/markdowns/sellings.
It seems that FHLB is a shock absorber, which is fine as long as the regulators are watching institutional concentrations. What's the ratio (of FHLB advances to total deposits) that will make regulators blink? Are Countrywide and Wamu anywhere near that ratio?
Its possible the ABX swings are overshots (35% loss ratios?). But if they are, they're likely indicative of forced selling or hedging. Irrational overshoots are highly probably in this environment, and they tend to feed vicious circles of more sellings/markdowns/sellings.
It seems that FHLB is a shock absorber, which is fine as long as the regulators are watching institutional concentrations. What's the ratio (of FHLB advances to total deposits) that will make regulators blink? Are Countrywide and Wamu anywhere near that ratio?
# posted by 
: 9:41 AM
: 9:41 AM
I heard that home values in California were overvalued by 40%. That means my house probably lost value, but it's paid off fortunately.
Also that was an impressive post, please consider writing an article at articlesaboutloans.com which offers exposure and ad revenue share. Thanks, have a nice day.
Also that was an impressive post, please consider writing an article at articlesaboutloans.com which offers exposure and ad revenue share. Thanks, have a nice day.
# posted by : 10:21 AM
: 10:21 AM
David, well, actually the ratios would not be differentiated from the borrowing side.
The proposal is for regulation of the Federal Home Loan banks, to make sure that they don't lend where inappropriate. To date they haven't taken any losses.
Really, the Federal Home Loan system was designed to do what it IS doing. It's just a question of whether they might run into trouble late assuming continuing problems. I think everyone is correctly assuming that downgrades and losses will continue.
On the ABX, I think the rash of bankruptcy filings is causing rational anxiety, but I also think it's overshooting down. I could be wrong. The swings are definitely indications of hedging, but that is the purpose of the darned index. You can't really be surprised that it is used as designed.
The proposal is for regulation of the Federal Home Loan banks, to make sure that they don't lend where inappropriate. To date they haven't taken any losses.
Really, the Federal Home Loan system was designed to do what it IS doing. It's just a question of whether they might run into trouble late assuming continuing problems. I think everyone is correctly assuming that downgrades and losses will continue.
On the ABX, I think the rash of bankruptcy filings is causing rational anxiety, but I also think it's overshooting down. I could be wrong. The swings are definitely indications of hedging, but that is the purpose of the darned index. You can't really be surprised that it is used as designed.
Paul - it varies by area. There have been very low pricing slumps in some small areas. The newly built-up areas are crashing like a bitch because of foreclosures and forced sales.
I would guess that the eventual blow in newer tract housing will be extreme. For older areas, I suspect more like 20% or so on average.
In areas that were not overbuilt, the lower-end but decent housing has way more support in the way of eventual demand after a substantial price correction than in many areas in Nevada. So it's really an area-by-area calculation. CA has one of the lowest rates of homeownership in the country.
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I would guess that the eventual blow in newer tract housing will be extreme. For older areas, I suspect more like 20% or so on average.
In areas that were not overbuilt, the lower-end but decent housing has way more support in the way of eventual demand after a substantial price correction than in many areas in Nevada. So it's really an area-by-area calculation. CA has one of the lowest rates of homeownership in the country.
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