Re: real estate loan question

[Marvin Gandall <marvgandall@xxxxxxxxxxxx>]

Micheal Perelman wrote:

> I saw that the article mentioned sub-prime loans, but would really risky
> loans like
> negative amortization loans be securitized?  If so, maybe the foreign
> investors would
> do better to buy the Rockefeller Center.
>
> On Sat, Aug 27, 2005 at 12:54:40AM -0400, Doug Henwood wrote:
> > Michael Perelman wrote:
> >
> > >Who bears the risk on the new-fangled real estate loans?  Are they
> > >securitized like
> > >traditional loans?
> >
> > Yeah it's mostly securitized. The WSJ had a piece the other day about
> > how foreigners were buying the stuff up lustily. They quoted a
> > Chinese portfolio manager who couldn't get enough of them. But our
> > own pension funds &  mutual funds are big buyers too.
> >
> > Doug
------------------------------
I don't know if they have been, but don't see why neg/am mortgages couldn't
be pooled and securitized. There's a buyer for everything, and not everyone
agrees with the consensus that housing price increases will slow or turn
negative. Nuts, eh? But there is no reason to fear negative amoritization
loans if you assume homeowners will be able to afford the backloaded higher
payments by refinancing or selling homes which are constantly appreciating
in value. Also, investors in mortgage-backed securities don't think they are
at risk even if they guess wrong; they take comfort in that MBS's are mostly
issued by government-sponsored enterprises (Ginnie Mae, Fannie Mae, and
Freddie Mac), with payment and principal fully guaranteed even when
homeowners default. What they worry about are a high volume of prepayments
which reduces their return, unlike conventional bonds where the return at
maturity is fixed and known.

Who bears the risk if real estate collapses? Same as always when the
financial system is at risk - the taxpayers. As you know, although Fannie
Mae and Freddie Mac aren't formally backed by the federal government, they
have an easy  line of credit with it, and it's become a cliche that they are
"too big to fail". The government is not going to let the Wall Street
brokerages, which also issue MBS's, go bust either.

But it would be an colossal mess to unwind. The MBS market, about $5
trillion worldwide, is reportedly now larger than the one for Treasuries.
Everyone holds them - commercial banks, mutual funds, hedge funds, pension
funds, insurance houses, the issuers themselves, states and cities, central
banks (China has a huge portfolio), moms and pops, all chasing higher yields
than a long bond. If the bubble deflates and homeowners start defaulting and
there is less demand for mortgages, MBS values will drop like a stone, and
the balance sheet of all of the above will be seriously affected. No wonder
the powers-that-be are fretting about MBS exposure and want to curtail
issuance by Fannie Mae and others; a public rescue would dwarf the S and L
bailout. We might get to carry the US dollar around in wheelbarrows if and
when that happens - just like in Weimar.