The Residential Real Estate Crash Index Message Board

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Strategies & Market Trends : The Residential Real Estate Crash Index

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To: patron_anejo_por_favor who wrote (109216)	3/12/2008 8:40:15 AM
From: ChanceIs	Read Replies (2) of 306849

>>>here's Lee Adler's response<<< Several thoughts: no information in the documentation of this announcement that the Fed will accept collateral at face value rather than market value. As I recall, there are some five factors influencing the market price of debt: 1) coupon value, 2) inflation risk, 3) default risk, 4) maturity risk, and 5) liquidity risk. Number 1 is straightforward. Who knows what inflation really is. Default...very subjective. Maturity...the further out in time, the more bad things can happen. Actually not too hard to price. Now liquidity risk!!!! How do price liquidity risk??? Liquidity risk changes by the minute. Arguably this is the whole justification for the FED move. The accountants have gotten up tight and are applying the lowest value possible to these "assets." God forbid one of them trade to establish a price. Basically the FED built a wall around that crap and put it in quarantine. It also made the banks a lot more liquid because they can trade the Treasuries. The only things certain about those instruments is the face value, and that the market can't be determines. The FED exchange rate is meaningless because the liquidity risk can't be accurately priced. I am sure that it was "marked-to-model" somehow, but what good is the model?? I don’t think that this frees up $200 billion for lending and speculating. Somehow I don't think that the banks will be engaging in much speculation. They are in the spotlight. The accountants and ratings agencies will have to treat them with the greatest conservative attitude, lest more junk be found and their reputations destroyed. I don’t see the connection between this action and stopping the deterioration of mortgage paper. To the extent that so much of it won't be dumped on the market at once, it will stop or slow the current "fire sale" and domino effect. I don't see too much to stop the free fall in real estate, which after all is what is making the paper worthless. The government isn't saying - 'take that $1,600 for the stimulus package and make an extra mortgage payment.' They are saying - 'take it to Wal-Mart.' The psychology in real estate is destroyed. Buyers won't buy and lenders won't lend. I suppose that we could see Resolution Trust Corporation Round II, wherein the FED auctions the mortgage instruments it just swapped to whomever. 'Whomever' then faces the problem of eviction and or collecting the principal and interest. This is a real problem because thousands have liens against one property through the slice and dice mechanism.

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