This bit of news just appeared on Briefing, it
seems there is an attempt to mitigate the on
going home mortgage problems.

FNM Fannie Mae: Justice Dept announcemet

Prudential notes that FNM announced this morning that the Justice Dept is discontinuing their investigation into FNM's accounting practices and does not plan to file any charges.While they have not viewed the investigation by the Justice Dept as a major risk factor following the OFHEO and SEC settlement, they nevertheless view this announcement as another positive milestone for FNM's recovery. Firm continues to believe that financial restatement and remediation process is progressing in line with the co's plan

Re: "In 2000, just 1 percent of American homeowners who got new loans had these types of loans, but by May 2005, about a third (33%!) of all borrowers did -- about the same percentage as in May 2006, according to new data from First American LoanPerformance, which tracks the statistics."

Let's assume (correctly I'm guessing) that during the past decade, the average home purchaser was reasonably well educated, apparently successful income earner. If that's the case, what motivated these folks to compromise themselves with such risky loans? Greed or the assumption that the trend is always up? I'm really fascinated by this behavior.

When I attended Grammar School ages ago (AKA Elementary) , the first lessons we were taught was Civics (AKA Social Studies) and U.S. History. Why? Because I believe our instructors attempted to enlighten us on the ebbs and flows of the US economy (AKA cyclic redundancy) and to always be prepared to flow with it. Horse and Buggy bubble, Railroad bubble, Automobile Bubble, Steel Bubble, Stock Market bubble, War Bubble, Technology bubble, Housing bubble, next Bubble...Cyclic redundancy!

Seasonal pattern for the DJIA is a peak around the end of the 3rd week of Augusts and slides into quarter end (9/30). Pattern shows if data for all years is considered or if data from mid-term years only is considered.

The data suggest to me that this is a particularly risky period to be aggressively long (if history holds any lesson in the ebbs and flows of stocks).

On the other hand it has been a relatively safe period for those who visit the dark side or park it in cash. I have used recent strength to lighten up across the board- from buggy whips to miners to technology.

The MID:SPX and RUT:SPX also suggest caution is warranted here.

stockman:

unless I am mistaken you posted a little while ago about the OEX put/call and how they had changed the classification of traders...

I was wondering where you got that information.
Has this rendered this indicator less relaible now?

thanks
tradesman

Big O...

Particularly enjoyed your paragraph on cycles.

tradesman-

If you mean the COT data... I had posted (from sentimentrader) that they had re classified the traders (large specs vs commercials I believe) and sentimentrader was questioning this as to making the future data comparisons less reliable (and helping to explain that particular week's jump in the data).

Don't recall posting on put:call.

Question here - who is taking the risk of this trade? What I don't understand is why banks are taking on so many risky loans?

I figure these banks will not go under willingly and have some sort of exit strategy -

dave, I can answer that one partially. Lenders have been reselling their loans as mortgage backed securies (MBS) -- in effect, passing along their risk to investors attracted by market beating rates of return. In some cases, loans have been sold before they are closed. Because they are virtually assured they are not carrying the risk long-term, this has caused some lenders to be, shall we say, be rather lax in their underwriting practices.

It would be great to hear from someone im the trenches on the general health of this particular market.

I remember reading something not too long ago about how a NYC bank was practically a real estate company that was allowed to give out loans. I don't remember where I read it, but I think it was in the Washington Post(D.C.). Could this be a sign that banks wanted a larger and more direct foothold in the real estate sector?

number2son,

Thanks for the info - so isn't it really the investors who buy these mortgage backed bonds who are the ones that suffer? I just don't quite get the argument yet that it is the buyer that loses, because he/she can delay selling by refinancing at a fixed rate, incurring a higher mortgage payment. This is much preferable to incurring a huge real loss because otherwise the owner would rather default on the loan. So really, isn't the risk on the lender since they're now stuck with a bad loan backed by a depreciating asset?

So I think a crash can only occur if for some reason, the lender demands a foreclosure (like a margin call) to prevent further losses in their investment.

Stockman:

thanks, ya I meant COT...

I sure wish they would stop tinkering with things M3, COT, CPI etc... whats next?

By the way, thanks also for your headsup (I believe it was you) on the counter cycle nature of pulp/paper stocks - as I had some success pairs trading these the last few weeks against the other commodity stocks...

tradesman

http://www.stockmarketbeat.com/

This site broke down the durable goods order a bit better for any who have interest.

http://www.stockmarketbeat.com/

This site broke down the durable goods order a bit better for any who have interest.

Oratier,
Home ownership is the good old "American dream." (And probably the Canadian dream, the British dream, etc.) You're talking here primarily about first-time buyers, who saw with this liberal financing and record-low rates that they could with a big stretch reach the first rung of the home-ownership ladder, a lofty dream for young marrieds, esp. those living in a small apt. in a not-so-hot neighborhood with their first or second young'un coming. (That dream that many of us waited well into our thirties or forties to achieve.) That plus some good salesmanship from the real-estate sales profession. These are people often unsophisticated in real estate economics, even price appreciation, and yet untouched by greed. Let' s hope with some compassion and education from the co. which holds their mortgage that they can hang onto those homes until they're back above water, and dad hopefully has gotten a raise, home ownership being a big step toward responsible citizenship and self respect.

I blame the loose regulations that encouraged and eased the process of re-financing along with the variable and negative amortizatin packages. In about 3-5 years, the foreclsure business will boom because of the high amount of people that will be upside down,m not only because they bought at the market high, but because they took money out to buy the Harley and the boat, etc.

Re: "These are people often unsophisticated in real estate economics, even price appreciation, and yet untouched by greed."

Very thougtful reply.

Re: "(That dream that many of us waited well into our thirties or forties to achieve.)"

This particular commment summed up the financial philosophy I was influenced by during my peak earnings years. My earned income peaked at $125.000.00 (never earned above this figure during my work years), therefore I had to save and sacrifice for the big-ticket items my family and I
eventually accumulated. That's why I'm fascinated when I read about 20 and 30 year olds earning $200K - $500K and are debt ridden. It is my belief (probably incorrectly, since I'm subsisting on retirement and investments income) that anyone, even in this modern economy, earning that amount of income should be debt free!

ALOHA !!

Banks based on fractional reserves(virtually zero reserves)have no risk. Where do these funds they lend to home buyers come from? A savings deposit? If the USA savings rates are negative then savings are not the source so that leaves... the Federal Reserve. Take out a $200k loan and the bank essentially tells the Fed to print up $200k electronic blips. All made possible by a fiat monetary system and house-of-cards economics. The US dollar is purely a debt instrument whereby the debt can never be paid off and the lenders play hot potato and musical chairs swapping mortgages.

The USA lending banks are like the Japanese banks in the 80's ... floating bad loans to just about anyone who has a pulse. In Japan the banks get creative and offer 100 year loans that way your kids can pay it off but the monthly mortgage payment drops so it is affordable. Perhaps in another ten years the Japanese banks will offer 200 year loans. The USA banks offer 30-40 year and I am sure 100 year loans will become available. So long as money is printed on paper why not? Win-win ... nobody ever has to default so long as there is "confidence" and a US dollar is accepted payment for all legal debts backed by the full "faith and credit" of the US government ... FDIC insured ... et al ... As we all know the US dollar is the World's financial "safe haven" ...

Just as a side note my father-in-law writes loans for pool and landscaping in the San Diego,CA area. He has told me on many occasions people believe that if they own a house worth $600k with little to no equity they are shocked when he informs them they do not qualify for a $100k pool loan even though they can afford the payment. It is their opinion that the house is collateral since it is worth $600k and could be sold easily to cover a $100k loan. This sort of mentality is very terrifying. Somehow here in America the message has become "debt is your friend" ... Hummmmmmm, I wonder where we learned that?

Agreed Oratier, but as i am told," Its a different world now " and we dont want to live like you did. Well, guess what, there is no teacher like experience.

Re: "there is no teacher like experience."

Good point!

During the early stages of my career, one of my mentors always admonished: "live every new experience to the maximum before moving on to the next one." and "be aware of peaking too soon in your career"
I live that advice. On the subject of housing: How can anyone enjoy the satisfying experience of planning, purchasing, maintaining and enjoying a home if the only objective is the short term acquisition and sale for equity.

And I do agree with the comment that:(am I'm paraphasing) "there are times when one is forced to leave a beloved residence due to the changing characteristics of the community" - to a point.

My grandchildren are moving back into the city (Washington DC), back into the very neighborhoods my generation abandoned due the changing demographics at the time, paying prices undreamed of when we brought (S500k today for a 3 bedroom, 1 1/2 bath Cape Cod we paid $25K for after WWII).

My only regret is not staying and joining the fight to maintain the quality and growing diversity of the city, watching while those great cities (Chicago, Philadelphia, Baltimore, Washington, Pittsburgh, etc) was defunded into decay.

Ahh...experience, with a bit of sentimentality...I wonder in five hundred years will the USA have cities with the stature and longevity of a London, or a France, even a Bagdad? (yea right, Oratier...like you will be around to Blog about it...)

http://www.econbrowser.com/archives/2006/08/new_home_sales.html
Posted by: Barkley Rosser at August 25, 2006 08:15 AM

Barkley: Some analysts argue that builders are throwing in a lot of extras to make the sale, keeping prices level. I don't know from direct experience, but I'd think the builders absolutely hate having a price decline. All those who just purchased scream bloody murder. So the builder would prefer to keep the price level by throwing in all kinds of extras, including loan terms, appliances, upgrades, pools, cars, trips, and anything to get that buyer into the house at the existing price.

Makes sense to me. So flat prices are probably not a good sign. The declines have already started but are masked by extras.