Data Dump
In the interest of keeping folks up on some of the data Noah has focused on the last number of weeks - and correctly so - I am giving Urban Digs readers a little real time data dump. There's no way I can duplicate Noah's graphics arts mastery so I'm not going to try. This dump will mostly be sans charts.
LIBOR to Treasury Spreads - This is the difference between yields on "riskless" short-term U.S. Treasuries vs. the short-term rates banks lend to each other at...and which they price various loans off of. These spreads continue to rocket higher as banks are scared to lend to each other and charging each other ever higher interest rates. Thi is because they can't assess each other's risk with regard to holdings of toxic sub prime paper. At the same time they are buying up "riskless" U.S. Treasuries as a safe haven as are all the other market players. This is driving a continued widening of spreads. As the old saying goes, "if you don't need to borrow money (or you can print your own) it's easy to get a loan".
More Blow-Ups - A short-term fund run by the State of Florida as a place for various Florida municipalities to park their cash and earn slightly better than money market fund rates has experienced a flight of capital by city governments that invested in it due to fears about its holdings of SIVs. Montana and Connecticut reportedly have similar problems with state funds and speculation is there are others yet to step forward.
More Poorly Thought Out Intervention - First there was the SIV masterfund plan, which was to bring together large banks to buy SIV overnight paper and keep these vehicles alive and off bank balance sheets. These SIV funds run by banks made the oldest mistake in the banking book, borrowing short and lending long or failing to "match maturities". So the government was going to get these same banks together to try to put together a fund to help these vehicles hobble through the crisis in overnight funding because longer-term the paper that the SIVs hold is supposedly not really that bad off. Tell me another! HSBC nixed this idea and went ahead and owned up to being responsible for its SIVs and took a big write down. I have not been hearing any new positive developments about the super SIV plan since.
ARM Freeze - So now we have a new novel government idea, freeze the interest rates on sub prime ARMs. Andy Laperriere who works the Washington beat for Fast Eddie Hyman (the famous Morgan Grenfell economist of the 1980s) at ISI Group wrote a great Op Ed piece in the Wall Street Journal Tuesday on why this idea is preposterous in terms of implementation and morally hazardous to the point of being laughable. He also points out that most sub prime paper has been going tapioca before the first interest rate increase....these people never had the money to pay back these loans, reset or not. My twist is this. Even after having done some work on the Myrtle Beach vacation home market, which I learned has historically been driven by speculators, I was still shocked to find out that "half the subprime loans made in 2006 were for homes that are not the owner's primary residence" what's worse these speculators had way higher median incomes than the local Myrtle Beach folk. You want to freeze interest rates for these knuckleheads..... please!....NEXT!
ABX Index - This index of sub prime paper caught a brief short-covering rally on the news of the potential freeze on interest rate resets. It was the biggest one day up move the index has ever had....that's what happens in bear market rallies, they are short, sharp and designed to punish bears that are feasting too aggressively on a sell-off. But the ABX started to give back today.
We are not out of the woods and this asset meltdown is following my asset cycle script pretty closely. Later in the week I will have some juicy tidbits from NYC developers....who are starting to get downright negative.
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Comments (2)
What will all of this do to mortgage rates over the short term (1-3 mos) and longer term(6mos-1 year) prospectives ? Especially in NYC which depends upon Jumbo mortgages for 1/3 of all sales. Will tighterlending lead to higher rates or will the lack of mortgages secured potentially lower rates to drive in more sales.
Posted by bb | December 5, 2007 9:09 AM
No question that in the short-term jumbo mortgages and borrowing costs for other loans not backed by a government entity (construction loans, permanent commercial real estate financing loans)have gone up. Additionally, availability has become tighter based on criteria like loan to value, interest coverage ratios, borrower credit rating etc. If the proliferation of bad debt persists, which i expect it will,these conditions will persist. The markets are now worried that availability for a host of other types of loans like car loans, credit cards etc. will also be cut by banks, further choking the machinery of the economy. However, government backed loans - Fannie Mae and Freddie Mac "conventional" mortgages have gotten cheaper as the Fed lowers rates and lending criteria have not changed and won't. The fed will probabaly keep lowering rates if and implore banks to lend if in fact banks keep tightening their lending policies....this is called the fed "pushing on a string" and generally happens early in downward credit cycles. They bottom when banks feel comfortable enough to lend all the cheap funds the fed is dangling in front of them....how long this will take is anyone's guess....mine is a year or more. In NYC Jumbos mortgages are much more important than conventional loans obviously, and it is possible that the definition of Jumbo could be raised to allow Fannie & Freddie to back bigger mortgages....but I wouldn't hold my breath.
Posted by jeff bernstein | December 5, 2007 9:32 AM