Tangled Web: Hail Mary Alliance
In June Christopher Cagan of First American Title put out another study on housing equity and mortgage. I wrote about his earlier study over a year ago stating then that it was flawed. To no surprise the numbers he projects today are much worse than before. And today once again most of his projections are flawed to my eyes. The data is useful however, especially this one showing equity for homeowners facing rate resets in 2007-2008. I believe the price assumptions used in June have proven to be far too optimistic, especially given the complete collapse of most nonconforming lending in late summer and fall.
The evidence suggests that housing prices are at least 5%, and possibly 10% lower at this juncture. New home prices certainly set the tone and are down 13% from last year. To measure the more conservative 5% impact, just shift the shift by that amount for 2007, and 2008 resets and we see that 23% of 2007 have no equity, and 40% of 2008 resets have none. If the 10% price drop is used (that I believe applies, or is about to apply), the 2007 reset goes to 35% without equity and the 2008 shows 51%. 25% will have negative equity of 10% in 2008.
Cagan estimates that using his firm’s June estimates of housing values, that the US is facing 1,110,704 foreclosures on the reset groups. He would add 70,000 more for each 1% drop in housing prices. He goes on to spit out the conventional wisdom that a million or a million and half foreclosures is “not going to sink” the US economy. What these analysts miss in these non-linear assumptions are the follow on and multiplier impacts of such an event. This would include “little things” such as a credit crisis which shuts down dicey lending. We are also seeing that now as job cuts spread throughout the finance and real estate sectors. This is no longer just a prediction, it is actually happening. So Cagan’s June numbers are heading to the trash bin as September and October foreclosures total well over 200,000 a month. Didn’t take long, and the question begs, what are these “experts” missing.
A total of 224,451 foreclosure filings were reported in October, up 94 percent from 115,568 in the same month a year ago, according to Irvine-based RealtyTrac Inc. The number of filings in October rose 2 percent from September’s 219,850.
There is a new spin at hand called the New Hope Alliance described in this WSJ article to try and offset this. This approach is largely implausible for several reasons. Hundreds of billions in mortgages have been securitized into MBS (mortgage backed securities), and are not owned by the servicers mentioned in the article. Changing the terms of mortgages in effect lowers the coupon on the security. This of course would have the effect of lowering the value of MBS. A MBS of say $1 billion might have an undetermined number of holders, and rarely if ever just one. How exactly does the New Hope Alliance secure the agreement of ten or fifteen MBS holders to lower coupons and terms. This could include a foreign central bank or two, and most certainly foreign financial institutions. How exactly does the US Treasury apply “suasion” against a foreign firm? Credit insurance is also put on against default and against altered conditions. If somehow some MBS were restructured under new terms this would in turn trigger a wave of claims against the credit insurance written against these securities. Would the insurers (if even still around) agree to pay these claims? This scheme as it applies to the mountain of MBS in the marketplace is just too much of a tangled web to ever be seriously implemented.
But of course we aren’t talking about serious here, but more about propaganda and spin to “restore confidence” in fictitious capital. The outcome of this deal are obvious from a mile away. Few if any MBS will be part of this program. Of course the major financial players have mortgages held as part of their portfolios. A token number of these will be cherry picked to be included in this scheme, which will be announced with great fanfare and a big gearing manipulation of the market. The real hope of the New Hope Alliance is to ensnare Aunt Millie, and some foreigners, and use any bid to dump securities on them. This one especially has slimy and tawdry written all over it.
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