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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: nspolar who wrote (8629)	1/7/2008 6:43:52 AM
From: robert b furman	Respond to of 33421

Hi Falcon, I think part of the feds hesitancy in just dropping the bottom in rates is that higher rates give the banking system a greater spread and thus faster capital recovery. LOSSES FROM POOR HOUSING LOANS ARE A GIVEN AS HOUSING PRICES DECLINE AND PEOPLE WALK FROM THEIR OBLIGATIONS. Losses for the banks will take time -quarters. Low rates hurt the banks profitability - my suspicion is the recovery is a longer term event - much like the tech bubble decline has finally caught up with chip sales some 6 years later. Housing supply is at 9 months - so there is excess inventory to work through. A recession is generally a deflationary force that works through an excess in supply. The good news is - it is so far in housing and mortgage related sectors. How that bleeds into others will be a big question.If you have your job and your house - I doubt it has much impact. Bob

To: nspolar who wrote (8629)	1/7/2008 10:05:20 AM
From: Hawkmoon	Read Replies (1) \| Respond to of 33421

But ... at what stage are financials in? Are they headed down to the very bottom of the abyss, or will they make a powerful reversal this spring? THAT is an even more interesting question... I really don't know.. The Fed wants to support the banking system, so maybe they will lower the discount rate more than they lower the Fed Funds rate, reducing the "penalty" for banks that borrow from it in order to finance the repurchase of those CMO/CDOs they sold to the SIVs and other hedgies. I hope folks will hear me out on this and provide some feedback on a theory I have. In part, what has caused this problem with mortgage loans is the disconnect between the mortgage iniator, and the ultimate consumer of the securitized mortgage bonds. In times past a bank both initiated the loan (vetting the borrower's credit worthiness) and then carried the loan. I personally know of one bank, Washington Federal:WFSL, that does not resell its loan portfolio (my father has his account there). They apparently are a very conservative bank that prides themselves on having not exposed themselves to the sub-prime loan mess. While other banks were moving their mortgage obligations off their balance sheets by reselling them, making room for them to offer loans to riskier borrowers, WFSL maintained their own loan portfolio and refrained from the riskier loans. So now there's a buyer's strike on these CMOs and no one wants to invest in them. It doesn't matter than the underlying assets, the homes, still retain some value. It's as if the CMO market is trying to tell us that this collateral is utterly worthless. So the banks seem to be writing off all of these loans completely, not just marking them down to present collateral value of the underlying homes (should foreclosure be required).. Thus, if my admittedly "simplistic understanding" of the situation is correct, when the banks write down the loans on their balance sheets, they will have the loans returned to their portfolios and the underlying collateral value will become the new basis for their value. Thus, loans that have been declared worthless will suddenly have at least 50% value (assuming home prices decline this much back to 2000 (pre-bubble) levels. It's like if I have an illiquid stock asset that's suddenly stops trading. My investment in the shares become, for the most part, worthless, because there is no liquid market for the stock. But because the company has intrinsic (but currently unmeasurable) book value, I may write down the investment as a loss waiting for someone to ultimately step forward and buy the company out for the value of its parts. Thus, I think the banks will recover when they have written off most of their riskier assets and returned to more conservative lending standards. And having written off those assets, at some point in the future they should be able to reapply the "book value" of those loans back onto their balance sheets in a positive manner. So.. what do you think? I would appreciate some clarity (correction?) on my theory. Mortgage finance is certainly not one of my analytical strengths. Hawk