US house prices in freefall -- redux

[Zkribbler]

There's a wonderful cartoon in today's L.A. Times.

A house entitled "Mortgage Crisis" is on fire.

A bucket brigade of Congress people has formed. The one furthest from the fire is plucking cash from a startled taxpayer's back pocket. The cash has been used to fill the buckets, and which is being passed down the line to be hurled into the raging fire.

[Lancer]

Good one Zkrib.

What do you guys think of the 300 BBBillion $ save the day package that looks like its going to pass muster?

[Kidlicious]

Originally posted by Ben Kenobi


True, but Oerdin was talking about the people owning houses. I doubt they would become homeless.

I don't recommend trusting your own instincts. Do some research. This could be a learning opportunity for you.

[Ben Kenobi]

I don't recommend trusting your own instincts. Do some research. This could be a learning opportunity for you.

Then sources would be most handy.

I'm always willing to consider verified viewpoints.

[Kidlicious]

Originally posted by Lancer
Good one Zkrib.

What do you guys think of the 300 BBBillion $ save the day package that looks like its going to pass muster?

It should help. Without it we would all probably be in deep ****.

[Kidlicious]

Originally posted by Ben Kenobi


Then sources would be most handy.

I'm always willing to consider verified viewpoints.

Really? You seem to be locked on to an idea that the economy is always functioning normally. In a situation like this crisis it makes you look particularly closed minded. In a situation where the economy is working like you think it should work you appear more reasonable.

If you will take some advice, reject everything you believe about how the economy works and go forward as if you don't believe anything. Then start with google.

[PLATO]

The latest housing news is out and it is, once again, not good. The Case Shiller 20 metro area index is now down nearly 16% from last May...bringing prices back to their 2004 level. Even worse is that many insiders are still saying that the bottom is not yet in sight. Miami, Las Vegas, L.A. and San Diego were among the biggest decliners.

Now...For the really big news of the day. Merrill Lynch pulled the trigger on a huge CDO sale yesterday. Merrill, in desperate need to sell assets and raise capital has establised a new firesale price for mortgage related Collateralized Debt Obligations. They have sold $30 billion dollars in original value for 22 cents on the dollar.

This is equivalent to saying that 78% of all the mortgages in these obligations will actually foreclose and that their is zero residual value to the real property attached. That is utter crap. The markets are happy because they are getting a certainty in price, but nearly all investors are quietly talking about the absolute killing that will be made in these securities.

This is the clearest example yet of why mortgage backed securities should be marked to model as opposed to marked to market.

[DanS]

More later, but the composition of Merrill's CDOs is unclear to me -- i.e., what tranches are they and what security is attached.

In any event, if they're such good investments at these prices, then go make your fortune. But... Not to put too fine a point on it... I remember that you advocated investing any spare dollar in C at $30 a share.

[PLATO]

Originally posted by DanS
More later, but the composition of Merrill's CDOs is unclear to me -- i.e., what tranches are they and what security is attached.

In any event, if they're such good investments at these prices, then go make your fortune. But... Not to put too fine a point on it... I remember that you advocated investing any spare dollar in C at $30 a share.

And I still think C is a very good long term investment. Don't forget that the Soverign wealth fund of Abu Dhabi felt like it was a good enough investment at $34 to put $7 billion into it.

Although I don't know the exact composition of the tranches on the CDO's that Merrill is selling, I believe the vast majority of them to consist of mortgage loans originated by its subsidiary, First Franklin, after December 2005. It is likely that this was blended with commercial paper as well which may be drawing the price down, but this is still a vastly undervalued sale caused by artificial market hysteria and uncertainty.

[DanS]

I bet that the managers of the sovereign wealth fund of Abu Dhabi feel like a bunch of chumps right now.

Regarding the Merrill CDOs, perhaps they are your more exotic types. Perhaps they are hard to value by outsiders. Perhaps they have other features that contribute to their illiquidity.

All of these considerations will factor into the market price and are outside the models.

It should be noted that the hard core value guys aren't touching this stuff yet. I think it's proper to ask why.

[DanS]

Originally posted by PLATO
The latest housing news is out and it is, once again, not good. The Case Shiller 20 metro area index is now down nearly 16% from last May...bringing prices back to their 2004 level. Even worse is that many insiders are still saying that the bottom is not yet in sight. Miami, Las Vegas, L.A. and San Diego were among the biggest decliners.

Actually, I thought it was pretty good news. On a month-to-month basis, 7 out of 20 metro areas had price gains. Most of the losses moderated. The exception being Las Vegas, which is still falling at a greater than 3% rate per month.

On the other hand, since May (the month covered) is normally a strong month, I guess I wouldn't be surprised to see the declines reaccelerate.

[pchang]

It's almost August

So in a quickly changing environment, data from May would seem to be of little use.

[DanS]

Well, it's the best we have.

[Ben Kenobi]

Really? You seem to be locked on to an idea that the economy is always functioning normally.

I don't believe unemployment under 5 percent is the sign of an economy which is functioning abnormally.

In a situation like this crisis it makes you look particularly closed minded. In a situation where the economy is working like you think it should work you appear more reasonable.

How is this not how an economy should work? You see an economic downturn and go "market failure". Market failure my ass. Did no one teach you that markets go up and down? Do you believe that markets are only supposed to go up?

If you will take some advice, reject everything you believe about how the economy works and go forward as if you don't believe anything. Then start with google.

If you have any evidence, I suggest you present it. I am open minded, but I guess I'd learn more from reading the Austrians.

[PLATO]

Originally posted by DanS
I bet that the managers of the sovereign wealth fund of Abu Dhabi feel like a bunch of chumps right now.

You may be right, but somehow I imagine they are taking the long view on things.

Regarding the Merrill CDOs, perhaps they are your more exotic types. Perhaps they are hard to value by outsiders. Perhaps they have other features that contribute to their illiquidity.

All valid questions for sure. Due to what I have seen and knowing what Merrill was doing during the time period in question, I am betting that the majority of the securities are adjustable rate mortgages. Just a guess, but I would bet on it.

All of these considerations will factor into the market price and are outside the models.

That is really part of the problem. There is no real market and never has been for these types of securities. These types of CDO's have normally been packaged up and the brokers go to work shaking their book of business. Most of these investments were intended to be long term. There really hasn't been a resale market as there is with most other types of securities.

It should be noted that the hard core value guys aren't touching this stuff yet. I think it's proper to ask why.

The primary reason for this is the uncertainty associated with the returns, not the actual values of the instruments. There is actually a lot of speculation going on this morning that Merrill's actions may be a good thing overall in getting this paper moving in the fact that they have set an actual market price for these instruments. The hope is that this will allow some of the money that has been drifting on the sidelines to reenter this segment.

It is still my opinion that the price is being set artificially low due to the uncertainties that have been associated with the returns and that this is, in a large part, due to the "mark to market" requirements. If the models were reevaluated for current performance levels and the securities properly rated then a "mark to model" valuation would be much more appropriate.

It is interesting that we are on opposite sides of this debate. I think that what we are discussing here is a reflection of the daily debate that is going on on Wall Street. So far your side is winning and the economy is losing.