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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (42368)	9/27/2005 12:40:34 AM
From: John Vosilla	Read Replies (1) \| Respond to of 110194

Thanks for posting that great report. Change in mortgage debt as percentage of GDP the past five years really stood out. Also it seems somehow someway they need growth in household net worth of over $4 Trillion a year to keep the economy growing.

To: ild who wrote (42368)	9/27/2005 10:32:56 PM
From: redfrecknj	Read Replies (1) \| Respond to of 110194

Passed on the article and received some interesting remarks: ...The REALLY stunning thing about that chart is that on a national basis housing has NEVER had a negative year in price appreciation since 1976 even with Paul Volcker's 17% Fed Funds. Worst case was one data point of 0% YOY gain mid-year '89 to mid-year '90. Let me emphasize again that for the purchase loan originator/securitizer MREITs, continued housing volumes on existing sales at the level reported yesterday coupled with flat housing prices is a perfect environment for them to prosper. The threat of refiing prepayments into new loans, hammering their portfolio runoffs, vaporizes and allows them to resume solid portfolio growth. Meanwhile both the carry trade MREITs(because of the Fed) and the refi specialists struggle. ...Also worth noting in the article is that the softening in prices in UK real estate hit their economy and particularly the area of consumer spending. It led to no significant pickup in mortgage delinquencies or defaults, a threat frequently levelled at non-prime lenders. The truth is people will cut back on darn near everything before they throw in the towel and give up their homes. And a doubling of defaults and delinquencies would only bring us back to the normal levels circa 2001, a period in which non-prime MREITs were fabulously profitable. I'll say it again: it's not the Fed and it's not default risk that hurts these guys, it's uneconomic competition which none of these measures address and could stop(may already have) at any time without our knowing it until the monthly production reports start to trickle in. ...A little more data mining from the article. On the % of household wealth in real estate, is anyone surprised that the still in place 60% haircut the NASDAQ took has pushed up the real estate contribution beyond actual price increases? And the owners equity chart(the inverse of the way it's usually published) is one I continue to find bullish. It's one example of how individuals get lost in details. The fact that all those cash out loans and new high LTV loans as the home ownership % has ramped up HAVEN'T lowered homeowner average equity means existing homeowners have dramatically increased their wealth over the period. Here's a counter stat on the affordability argument(the notion that mortgage debt is too high for households to handle). It comes from my boys at the BEA. The prosperity of the last several decades has led to "necessities" spending(defined as consumption of non-durables and energy services as a % of disposable income) is at an all-time low of 30%, down from 36% in recent decades. This is a dramatic booster to mortgage debt service capabilities. The coda in the article on the ABS markets worth mentioning. As NEW(New Century) one of the players that has been buying market share uneconomically, so any negatives that appear in terms of acceptance of their ABS issuance is a plus for the conservative players in the non-prime game. As to the ABS/MBS market itself, the hunger for paper there even exceeds that for Treasuries worldwide. Doubt it? Try to get some for your account. All get pretty quickly privately placed. Being able to get an asset paying at thirty year bond rates almost certain to be called within five as folks move and refi is the ultimate hedge for money. Long rates with short duration is honey and cream! ...What is uneconomic competition? Ultra low teaser rates and coupon rates on new mortgages that are well below industry averages, the latter of which are closely related to costs. It means I buy market share and figure out how to make money on it later. ...<The fact that all those cash out loans and new high LTV loans as the home ownership % has ramped up HAVEN'T lowered homeowner average equity means existing homeowners have dramatically increased their wealth over the period> That is an awesome point. <As NEW(New Century) one of the players that has been buying market share uneconomically,> They are the ones that SAX refers to when they claim "competitive pressures". I'm sure NFI has some hurtin' too, although it is hard to see it in their monthly numbers. I own a good chunk of NFI (probably too much). <Long rates with short duration is honey and cream!> Another awesome point and one that goes against the grain. Thanks for the educational post, one that makes me go "hmmm....never thought of that".