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1 of 4's Comments Stream Stats
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- Total Comment Stream rating - = 12
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The Problem with Option ARMs
What Corporate Yield Spreads Are Telling Us About Equities
Free Marketeers for Wage and Price Controls
Why AIG Gets Billions While GM Gets Scorn
In Defense of the CDS Market
On Dec 09 05:31 PM TomArmistead wrote:
> CDS, like any other form of insurance, is useful.
>
> Being insurance, CDS should be regulated as such: 1) there should
> be a requirement of insurable interest 2) those who write the coverage
> should be regulated to be sure their capital is adequate.
>
> If CDS had been regulated along these common sense lines, a lot of
> financial mayhem would have been prevented.
>
Is Real Estate Investing Our Best Shot at Wealth?
Gisele Bundchen - Predictor of Currency Movements?
Berkshire's Puts: Not Such a Great Idea
The Difference Between Rubin and Paulson
All that said, I would not normally attribute broader views to traders. Their focus is even more narrow than the deal makers and their goal is just to make money regardless of market direction.
O.C. Housing Market: Sales Are Booming, Prices Are Not
I myself worked at WAMU from 2001 to 2004 in their failed effort to build a commercial bank in California. Based on the mortgage activity I saw there, I knew the market was not sustainable. When the Fed started to raise rates, the easy money mortgage refinancings resulting from 50-year low rates on 30-year USTBs started to dry up. The push was for new purchase loans and with the ever increasing real estate prices the shift was towards ARMs, Option ARMs and subprime to keep the game going. There were people in my office with high school degrees making half a million a year answering the phone to originate mortgages. They all thought it was due to their smarts and good looks. I knew it would not last. I also felt that prices would break back to about 2003 and they have. My big mistake was not proactively taking advantage of the impending burst of the bubble.
All that said, I agree with your assessment. The real estate market here has past the worst phase of the subprime crisis. The next washout will be due to collateral damage from the credit crunch and recessionary downturn. Most of the subprime damage has been concentrated in the central part of OC where the lower income housing is. The higher priced housing has just sat and those owners are riding it out, holding their breaths (myself included). We'll see, but I think the worst is over.
Steve
Three Problems with the Fannie / Freddie Mortgage Modifications
Furthermore, your conclusion that they would be better off walking away from the current situation where they are merely "paying rent" and getting into a better housing situation with upside is based on the false assumption that their credit record would allow them to do so.
Lot of people took out 30 year mortgages due in 5 or 7 years on the assumption that they'd only be in the home for less than 5 or 7 years and thus would not face the higher reset rate on the balloon that was due. How is this any different than the refinancing risk on the balloon at the end of your 10-year recovery scenario?
I'm sorry, but your description here wreaks of a prevailing attitude that purchasers of real estate are entitled to capital gains while the downside risk is only to be born by the lender.
On Nov 11 05:32 PM RJMoran wrote:
> I have to agree with PK...
> The last time prices fell 30% in Southern California, it took 10
> yrs to get back to the 'top' or 'break even' point for the mortgage.
> In other words, IF you bought a $600K house that is NOW worth $400K,
> even if the government modifies your loan, you are essentially paying
> 'rent'. In the forward 10 yrs of paying your mortgage, you'll NEVER
> accumulate ANY equity and will only get you out @ your original $600K.
> You're essentially servicing a loan like a renter is paying a landlords
> mortgage! You are 'renting' your own house till the mortgage is
> paid OR you move and STILL have a balloon payment to pay off...WHY
> would anyone do this!? Walking away and getting into another situation
> where there is at least SOME upside Equity potential would be THE
> only answer for these people! Sorry...
Obama's Green Obsession: More Harm Than Good?
"I notice you don't say FOR WHAT TIME PERIOD? You are an idiot....."
Sorry Alldonewithtech, but maybe you need to read up on what a kilowatt hour (KWh) is:
* Watts is the rate of use at this instant.
* Watt-hours is the total energy used over time.
To measure use over a period of time, we use watt-hours, not watts. The way it works is, watts or kilowatts for the amount at a given instant, and watt-hours or kilowatt-hours for the amount over a period of time. 1 KWh is 1000 watts over an hour's timeframe.
AIG: New Math for Understanding What Went Wrong
The Downside of CDS Demonization
One of the great failings of this financial crisis is the result of the originate for distribution mortgage market. No one held the mortgages on their balance sheet as they went down the distribution pipe to become CDOs. No bank capital was allocated to them. No one in their right mind would hold those subprime junk mortgages. After they got packaged up into securities, suddenly banks were willing to hold them. The yields looked good versus the regulatory capital required against them. Then, as you've pointed out, the risk was hedged with CDS to the extent possible. Ultimately the real losses came on the underlying debt securities, yet without the CDS how much of these junk securities would have been absorbed in the market? The CDS market acted like a security blanket cajoling Banks into buying and hedging this junk when they never would have held the individual mortgages in the first place because they knew the risk. So, to argue that CDS was not the problem is to ignore the fact that it facilitated the whole crisis.
AIG and the Free Lunch Myth
Billp's comment is spot on. Also, AIG (and the entire CDS market) violates a fundamental law in the insurance indusrty: you can only sell insurance to those who have an insurable interest. Which means buyers of the CDS must hold the underlying security or debt to have an insurable interest. This restriction alone would have eliminated the speculation and really contained the CDS market.