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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Square_Dealings who wrote (54466)	6/17/2000 11:05:00 AM
From: Haim R. Branisteanu	Read Replies (4) \| Respond to of 99985

Mike there is another problem with banks which was not brought up on this tread and that is mortgage underwriting. It is obvious to any one that the real estate market is red hot especially on both coast. Banks lend 80% of a home and if those homes appreciated over 20% in the last two years it is a very risky loan as the owner equity can or will be wiped out very easily. So even if loan payments come in as expected the loan will still be in default due to L/V ratio and general reserves must be set aside in case that the loan is still on the bank books. Now in the late 80 thies they designed the MBS and CMO's which actually moved those loans from banks to pension funds and insurance companies, not to mention US government agencies such as FNM, at relative small spreads above US treasuries. All that was great for every one wen the L/V was rising and defaults were easily resold / refinanced, and the main problem was prepayment to lock in lower interest rates. Due to the treasury buy back and re-inflation in corporate debt and it's variety the banks ended up not to be only a warehousing of mortgages business and pocked the spread, but got stuck with many of the loans they wrote and open themselves to substantial risks which in the last years were taken over by third parties. So regardless if the loan is actual a performing loan, the banks may need to set aside reserves due to the L/V factor and would not be able to change the terms as the loan is paid back in time. This by itself lowers substantially the bank profitability. A lower dollar does not help either as overseas money will see RE prices soften on a relative basis and stop buying as they have done wen the dollar was trending up. Actually I think they will start selling to look in profits which further put pressure on the red hot RE market. So RE are in a bind rising rates to protect the dollar or softening dollar which means SELL, ........ and both have the same effect ........ the lowering of RE prices........ and all this is without taking the stock market into account which propped RE prices in the first place.......... as they say HOUSE of CARDS <GG> Bankers saw that coming and that is why they pressured the congress to change a sound law and get into insurance and brokerage business ......... so we are back to the same unhealthy financial situation of 75 years ago ........ wen banks are insured or risk protected / adjusted on derivatives and computer models. Hope it helps .... and stay away from banks ........ BWDIK Haim