Saturday, August 11, 2007

Will Get Worse Before It Gets Better

$170 billion in adjustable rate mortgages reset in the second half of 2007, $400 billion reset in 2008.

Despite assurances from Bush administration officials and the shills on CNBC, fallout from the subprime mortgage mess is NOT over.

Josh Rosner, a mortgage expert from Graham Fisher, a New York-based investment research firm, says that losses from the worsening subprime mortgage mess will surpass losses from the S&L crisis in the 1980's:

"In terms of ultimate losses, it will be worse," Rosner said. "It's a bleeding into the system, a drag on the economy over the life of these mortgages."

The worst losses on mortgages originated in 2006 won't even start to have an impact on the market until the end of 2008, Rosner said.

"That's all the analysis you need to know things will get worse," he said.

If you were watching The Closing Bell or Kudlow & Company on CNBC last night, you would have thought that subprime-related problems were ended yesterday when the Federal Reserve injected $38 billion in temporary funds into the banking system to handle liquidity problems.

But the reality is, losses from defaulting homeowners with ARM's are just starting and have a long way to go before we reach the peak.

If the Fed lowers interest rates, it is possible that some of those losses can be averted.

But with import, energy and food prices still rising while U.S. GDP growth is slowing, the Fed risks creating serious stagflation problems if they lower rates now.

Bernanke's in a tough spot.

I still think he will cave to the markets and lower rates in September.

The market seems to think so too.

I guess they're used to having a Fed chair come in and bail them out when they get into trouble because of their own greedy excesses.

Apparently, it's only a "moral hazard" when poor people get bailed out from the consequences of risky behavior.

When the Fed bails out the investment class for similarly risky behavior, it's called "good economics."

UPDATE: Bonddad says the Fed won't cut rates because the dollar is near a 17-year low.

SECOND UPDATE: Praguetwin notes this in comments:

Although a rate cut would hurt the dollar, the Fed policy is to believe in a strong dollar, but never to take policy actions to try and support it.

The strength of the dollar is well down on their priority list.

That's a good point. The difference between what they say and what they do is pretty big.

"I saw the CFO of ING say they were only exposed to about 50m EUR of American Subprime (actually very little for them, they are huge)."

Sorry RBE, that was from the last post, but caught my interest on the basis of local and global.
It's not over by a long shot. But the local on ING is they have just pulled out of a local development right here, a $150 mil retail development.

I was looking at the local dynamics then you show me the wider issues at play - they are trimming their sails!

What really concerns me on the depth of this problem was finding hedge funds are geared up to seven times.
Christ! Can you imagine having a seventh mortgage? Because of the complexity of this mess no-one really knows where the final chips might fall.
But the bottom line is that retirement funds are badly exposed and the biggest potential losers.
The math suggests that a relatively minor collapse will leave those on the bottom of the heap with nothing.
And... :(
Some Aussie media reflections:

As interest rates have risen, the number of people defaulting on these loans has climbed sharply. This has rippled through the banking system because much of that subprime mortgage debt has been bundled up and sold on. Now investors are taking flight from that risky end of credit markets.

One Australian fund manager, trying to be upbeat, says:
"It's really anybody's guess how long that unwinding of leverage can run for. It might run for months before they've finally unwound all of these absolute return funds and collateralised debt obligations and whatever.”

The scary part is that he is talking about the institutional investors, not the baseline mum and dad (pension) investors. No one gives a flying fuck about them.

I have read that the pension funds will probably be left holding the bag, as it were.

The more sophisticated traders were throwing that debt around like a hot-potato, but the pension funds are more likely to buy and sit.

Many will be left sitting in the rain.

The funny thing about the lack of concern for Mom and Pop, and sub-prime borrowers facing defaults is the fact that these people are consumers. Even the most heartless analyst should understand that in an economy that is based on consumer spending, when the little guy gets crushed, so do the big guys.

Although a rate cut would hurt the dollar, the Fed policy is to believe in a strong dollar, but never to take policy actions to try and support it.

The strength of the dollar is well down on their priority list.
cartledge, I think pt is right about the pension funds holding the bags of "toxic waste" left over from the subprime mortgage mess.

I think my own pension fund is pretty toxic.
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