by Anonymous on 8/11/2007 08:51:00 AM

I just got around yesterday afternoon to reading the full announcement that went with S&P's recent negative rating actions on Alt-A deals. I know it's not as exciting as Fed repos, but periodically we are allowed a little "No, really?" at the expense of a rating agency:

In late 2005 and 2006, mortgage origination underwriting guidelines expanded rapidly, which allowed the proliferation of layered risks within the Alt-A market. This combination of multiple risk factors for a single loan is the principal driving force behind the deteriorating performance of the 2006 vintage. Historically, the presence of high FICO scores within a loan has proved an effective mitigant to increased risk factors elsewhere, such as higher CLTVs. However, the increase in recent delinquencies across all FICO bands indicates that a borrower's previous credit performance is less
predictive of stronger performance for loans with increased risk layering. This emerging delinquency performance has prompted us to reduce our emphasis on FICO score as an offset to layered risk.

Insofar as FICOs are accurate measures of past performance, high scores indicate borrowers who have managed credit wisely in the past. Put those borrowers in unwise credit terms, and they perform just like people who have managed credit unwisely in the past. Glad we got some real-time empirical data to prove that. Sorry about your global financial crisis.

There's more:

Recent delinquency data also indicates a need to adjust default expectations for certain purchase loans. These loans are underperforming our initial assumptions, particularly when combined with high CLTVs. The performance related to purchase loans is unprecedented in historical data. We will increase our default expectations for the increased risk at high CLTVs, particularly those with CLTVs that exceed 90%.

It is, of course, perfectly true that all "historical data" I am aware of has shown lower risk for purchase transactions than for refinances; somewhat lower than no-cash-out and significantly lower than cash-outs. Of course there has always been a bit of a problem around the "well, controlling for CLTV, that is" part. As with the FICO thing, we only just got ourselves a big database of loans with nutsy CLTVs for all loan purpose types.

The thing is, S&P isn't the only one with a model that has been giving extra credit in the risk-weighting to "purchase" transaction types; just about everyone has. Credit models, pricing models, due diligence selection protocols--they've all included the "purchase benefit." The point is to ask why it is no longer a "benefit," and the CLTV issue is only a part of that. Or, at least, there's more to the CLTV issue than its value relative to historical lending patterns.

The fact is, historically appraisals for purchase-money transactions were the most reliable. Time and again you could test them and see this. We have always believed that it had something to do with the fact that in a purchase transaction, you have a sales price to work with. There was a vague sense among us that with a buyer and a seller out there behaving like Econ 101 says they behave, the sales price--and the comparable sales prices--would ground a purchase appraisal in some kind of "reality." It's not that all refi appraisals are bad, but that they are, as I've said before, inevitably a kind of "mark to model." Purchase appraisals are supposed to be "mark to market."

Funny how some people's models have worked out better than a lot of people's markets, isn't it? Value, of course, is not simply equal to price, and prudent lenders wouldn't be messing around with the time and expense of appraisals if it were. Everything you read about appraisers being pressured to "hit the number" boils down to an industry trying to force "value" to equal "whatever dumb offer someone can be crazy enough to make today." S&P wants to see this as a CLTV issue, and surely it is wise to stop making sunny assumptions about 100% financing, but the fact is that 100% financing works as long as the numbers keep going up.

We were talking yesterday about jumbos and conforming loans and their relative risks. Traditionally, lenders always required two separate independent appraisals for higher-end properties. For years, the cutoff was $650,000 or thereabouts; it sneaked up to $1,000,000 during the boom. I can remember reading a major Alt-A conduit's guidelines in 2004 or so and discovering that their appraisal standards depended--get this--on LTV: for loans over $650,000, a second appraisal would be required if the LTV were over 70%. It said that in the published guidelines. It made sense to a bunch of credit analysts that you could use "V" to decide how you were going to determine "V." Certainly, using a dollar-amount rule can sometimes seem arbitrary. But count me in the arbitrary group.

We are learning here that what are called the "soft guidelines"--all the rules and procedures of a lender that are not easily quantifiable in numbers that can be plugged into a computer model--are making a difference. OK, well, some of us have been insisting for years that this is the case, but the world that wants cheap, fast credit analysis of huge pools of loans without loan-level due diligence or highly-complex analytical models (say, ones that have more than Fitch's famous three doc types), is apparently in wounded-innocence stage. No wonder we'd rather be stunned and surprised by a weekend's worth of Fed repos.

by Calculated Risk on 8/10/2007 06:44:00 PM

Note: there is no mention in the OFHEO statement about changing the conforming limit.

From OFHEO:

The portfolio caps were put in place last year because of their serious safety and soundness issues in response to Fannie Mae’s request to increase the portfolio caps, we issued a letter today to Fannie Mae. We also issued a response to Senator Schumer’s recent letter on this topic, which is attached. The letters indicate that we will keep under active consideration requests for an increase in the portfolio caps, but we are not authorizing any significant changes at this time.

Click on graph for larger image.

This is an excerpt from the OFHEO letter to Senator Schumer (link above) describing OFHEO's views of the subprime, Alt-A and Jumbo prime segments.

by Calculated Risk on 8/10/2007 05:39:00 PM

From MSNBC: Fed takes action, but was it soon enough? (hat tip ac)

On Friday, as Bernanke faced the first big crisis of his 18-month tenure, the central bank was forced into action, buying up billions of dollars worth of crumbling bonds in an effort to stabilize financial markets that appeared to be coming unglued.

Nope.

Update: Technically the legal ownership of the collateral apparently does change hands, so saying the Fed is "buying" is not completely inaccurate - just misleading. It's been some time since I've looked at how a Repo works, so this has been an interesting exercise for me.

The Fed engaged in fairly ordinary 3-day repo activity (calender days) as detailed at the NY Fed: Temporary Open Market Operations

These Repos were all for MBS; usually they accept more Treasury and Agency collateral. And the size was a little larger then recent Repo activity.

What was unusual today was the Fed statement: The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets.

But the Fed didn't buy "billions of dollars worth of crumbling bonds". The MBS is just put up as collateral, and unless the banks go under in 3 calendar days, they will pay the loan back with 3 days of 5.25% interest. No big deal.

by Calculated Risk on 8/10/2007 04:21:00 PM

From Bloomberg: Goldman's Global Alpha Hedge Fund Falls 26% in 2007, People Say (hat tip REBear)

Goldman Sachs Group Inc.'s $8 billion Global Alpha hedge fund has fallen 26 percent so far this year, according to people familiar with the fund.

According to earlier reports, the fund was off 16% at the end of July:

Global Alpha, Goldman's widely known internal hedge fund, is now down about 16% for the year after a choppy July, when its performance fell about 8%, according to people briefed on the matter. The fund, based in New York, manages about $9 billion.

If these reports are accurate, the fund has lost about 10% so far in August.

by Anonymous on 8/10/2007 03:08:00 PM

From Marketwatch, "How effective would Fed rate cut be?":

"It is unwise bordering on imprudent to assume that terrible will not follow bad," Catalano said.

by Anonymous on 8/10/2007 12:04:00 PM

From the New York Times:

Banks that are worried about their own liquidity decided this week to increase their reserves, which they can do by borrowing from other banks. Loans on such rates rose as a result of the added demand. Both the federal funds rate — the rate on loans of reserves between American banks — and the London Interbank Offered Rate leaped sharply yesterday.

The Fed — which conducts monetary policy by focusing on the fed funds rate — was forced to inject money into the system to bring the rate back down to its targeted level. And the E.C.B. lent almost 100 billion euros ($130 billion), to European banks.

If the current panic is just that — unreasoning fear — then such cash infusions may be able to let the new financial system weather the storm. Money can be lent to those owning the dubious securities, obviating the need to sell. As they eventually turn out to be good, the loans can be repaid and all will be happy.

On the other hand, if many of those securities turn out to be as bad as people now fear, some of those loans will not be good, and there may be more financial failures.

by Calculated Risk on 8/10/2007 09:48:00 AM

UPDATE: From Bloomberg: Fed Adds $19 Billion in Funds by Buying Mortgage Debt (Hat tip Napolean)

The Federal Reserve added $19 billion in temporary funds to the banking system through the purchase of mortgage-backed securities to help meet demand for cash amid a rout in bonds backed by home loans to riskier borrowers.

The Fed accepted only mortgage-backed debt as collateral for this morning's weekend repurchase agreement. ...

Fed funds traded above the central bank's target for a second straight day. The Fed's benchmark was 6 percent the last time fed funds opened at today's level.

After the Fed addition today, Treasuries pared their gains. Stocks dropped worldwide on speculation the losses in mortgage debt will hurt economic growth and earnings.

Click on graph for larger image. (hat tip Brian)

From the Federal Reserve:

The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets.

The Federal Reserve will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the Federal Open Market Committee's target rate of 5-1/4 percent. In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets. As always, the discount window is available as a source of funding.

See Professor Thoma at Economist's View for an explanation of how this works. Also see Dr. Krugman's comments:

And here’s the truly scary thing about liquidity crises: it’s very hard for policy makers to do anything about them.

by Anonymous on 8/10/2007 07:48:00 AM

The Washington Post reports this morning on the heart-rending situation of upper-middle-class borrowers who are facing the dire situation of being offered a jumbo mortgage interest rate of "more than 7 percent":

Nicholas Schor and Liza Losada-Schor were ready and willing to spend up to $850,000 on a house in Maryland. That was a month ago, when the rate on their mortgage would have been as low as 6.25 percent.

But a sudden shift in the mortgage market means that the couple -- he's a psychiatrist, she's a clinical nurse psychotherapist -- now face a rate of more than 7 percent, reducing their buying power even though they have solid credit. That's because in the past few days, rates on loans for more than $417,000, known as jumbo loans, have shot up.

"I'm sort of surprised that even though we have excellent credit and excellent income and are putting down a 20 percent contribution that the banks aren't able to offer better rates for folks who seem to be a more reliable investment," Schor said.

This is "price rationing," the evil twin of "nonprice rationing," the two components of a thorough-going credit crunch. The Schors may be surprised to discover that the same mechanisms that allowed ample credit to high-risk borrowers also kept the cost of credit to low-risk borrowers artificially low, but those of us in the financial industry do not speak of credit crunches in tones of horror because they are simple predicable, controllable "corrections" that merely tidy up a few regrettable underwriting guidelines and leave the traditionally-creditworthy unscathed.

Of course, it could have something to do with that $850,000 house:

"With a rate increase from 6.75 percent to 7.5 percent, the buyer's buying power just dropped by 10 percent," said Frank Borges LLosa, a broker at FranklyRealty.com. "That $600,000 buyer will now have to look at buying a $550,000 place or paying 10 percent more per month for the same house versus last week."

That's what happened with the Schors. They recently bid $675,000 for a six-bedroom house in Olney, instead of the higher amount they originally thought they would spend. They are still hoping they can find a mortgage lender that will offer a better rate.

It is possible, however, that the lender will be just as spooked by the appraisal of the $675,000 house as the $850,000 house. There's a lot of price froth yet to evaporate in Olney, Maryland.

I don't particularly want to pick on the Schors--I'm sure they're nice people and decent credit risks--but theirs is the story I think of frequently when I hear clamoring to raise the conforming loan limit. I don't hear too many folks asking how Fannie and Freddie can afford to shave 100 bps off the Schors' interest rate when the private jumbo market cannot.

by Anonymous on 8/10/2007 07:04:00 AM

Via Clyde, from Financial Times:

Borrowers of alt-A mortgages may be of higher caliber than their subprime counterparts, but that hierarchy doesn’t necessarily hold for the bonds backed by the two types of loans. In fact, some alt-A securities are trading in line with comparable subprime-backed bonds, according to several market participants.

“We’ve historically been very wary of alt-A because of the decreased levels of subordination in the transactions,” said a buyside source. “We are much bigger believers in subprime.” . . .

Despite what may be higher credit fundamentals of alt-A mortgages, securitizations of the loans are more vulnerable to losses in underlying collateral. That’s because rating agencies have not required as much credit enhancement on the transactions as they have for subprime deals, according to a research report by JPMorgan Chase.

For now, alt-A borrowers are defaulting more slowly than subprime mortgage borrowers, as evidenced by their lower delinquency rates. JPMorgan found that 60+ day delinquencies averaged 7% for a sample of alt-A loans originated in 2H06 versus just under 13% for the ABX deals of the same vintage.

But some investors are opting for subprime securities because of their higher yields and credit protection relative to alt-A. Increasingly valued as interest only investments, subprime-backed bonds purchased at low enough dollar prices may generate superior returns, the investors say.

While subrime delinquencies outnumber those on alt-A mortgages, a fair number of alt-A bonds rated A2 and lower and originated in the second half of 2006 have loss coverage ratios of less than 1 assuming a 30% severity, according to JPMorgan. That compares with an average 1.31 loss coverage ratio for BBB rated subprime bonds underlying the ABX 07-1 index and 1.15 for BBB- bonds, assuming 40% severity. . . .

Key predictors of alt-A securities’ performance are borrower FICO scores, percent of limited or absent documentation loans, exposure to risky geographies – mainly California and Florida – and the loan-to-value ratios of the underlying collateral.

Subordination levels relative to expected losses suggest that most AA and A-rated alt-A bonds are behaving like single-Bs, according to JPMorgan, which tested roughly 30 deals late last month.

by Calculated Risk on 8/10/2007 02:19:00 AM

Paul Krugman writes in the NYTimes: Very Scary Things

Note: the NY Post is reporting that these columns will be free in the near future. Excerpts are from Economist's View.

What’s been happening in financial markets over the past few days is something that truly scares monetary economists: liquidity has dried up. That is, markets in ... financial instruments backed by home mortgages ... have shut down because there are no buyers.

This could turn out to be nothing more than a brief scare. At worst, however, it could cause a chain reaction of debt defaults.
...
When liquidity dries up ... it can produce a chain reaction of defaults. Financial institution A can’t sell its mortgage-backed securities, so it can’t raise enough cash to make the payment it owes to institution B, which then doesn’t have the cash to pay institution C ...

And here’s the truly scary thing about liquidity crises: it’s very hard for policy makers to do anything about them.

See Economist's View for more excerpts.

by Calculated Risk on 8/09/2007 08:40:00 PM

Countrywide Financial Corporation (CFC) filed their 10-Q today with the SEC. Since CFC is the largest mortgage lender in the U.S. it is worth reading their outlook. Here are a few recommended sections:

Outlook

Near the end of the second quarter and shortly thereafter, market demand for the securities that we create in our loan securitization activities was negatively affected by investor concern about credit quality and demand for higher yields. As a result of these changes, we expect in the short term to retain more loans in our portfolio of loans held for investment or to hold additional loan or security inventory until market conditions improve.

Similarly, during the third quarter, funding liquidity to mortgage companies became constrained. We believe we have adequate funding liquidity to accommodate these marketplace changes in the near term; however, the secondary market and funding liquidity situation is rapidly evolving and the potential impact on the Company is unknown. Continuation of these conditions or further deterioration could result in further reductions in the Company’s funding volume. Our strategy of retaining a larger portion of loans or securities may impact our gain on sale margins in the short-term.

Prospective Trends

We believe the current environment of rapidly changing and evolving markets will provide increasing challenges for the financial services sector, including Countrywide. Specifically, in the near term, we may experience:

· Continued pressure on housing values and mortgage origination volumes

· Increasing delinquencies and foreclosures

· Continued disruptions in the secondary mortgage and debt capital markets and

· More restrictive legislative and regulatory environments.

Under Risk Factors, CFC has added a new risk:

Debt and secondary mortgage market conditions could have a material adverse impact on our earnings and financial condition

We have significant financing needs that we meet through the capital markets, including the debt and secondary mortgage markets. These markets are currently experiencing unprecedented disruptions, which could have an adverse impact on the Company’s earnings and financial condition, particularly in the short term.

Current conditions in the debt markets include reduced liquidity and increased credit risk premiums for certain market participants. These conditions, which increase the cost and reduce the availability of debt, may continue or worsen in the future. The Company attempts to mitigate the impact of debt market disruptions by obtaining adequate committed and uncommitted facilities from a variety of reliable sources. There can be no assurance, however, that the Company will be successful in these efforts, that such facilities will be adequate or that the cost of debt will allow us to operate at profitable levels. The Company’s cost of debt is also dependent on its maintaining investment-grade credit ratings. Since the Company is highly dependent on the availability of credit to finance its operations, disruptions in the debt markets or a reduction in our credit ratings, could have an adverse impact on our earnings and financial condition, particularly in the short term.

The secondary mortgage markets are also currently experiencing unprecedented disruptions resulting from reduced investor demand for mortgage loans and mortgage-backed securities and increased investor yield requirements for those loans and securities. These conditions may continue or worsen in the future. In light of current conditions, we expect to retain a larger portion of mortgage loans and mortgage-backed securities than we would in other environments. While our capital and liquidity positions are currently strong and we believe we have sufficient capacity to hold additional mortgage loans and mortgage backed securities until investor demand improves and yield requirements moderate, our capacity to retain mortgage loans and mortgage backed securities is not unlimited. As a result, a prolonged period of secondary market illiquidity may reduce our loan production volumes and could have an adverse impact on our future earnings and financial condition.

by Calculated Risk on 8/09/2007 05:15:00 PM

From MarketWatch: S&P: 76 ratings on 19 U.S. cash-flow, hybrid CDOs may be cut (hat tip Gary)

Standard & Poor's Ratings Services on Thursday placed ratings on 76 tranches from 19 U.S. cash-flow and hybrid collateralized debt obligation transactions on creditwatch with negative implications. The affected tranches have a total issuance amount of $2.16 billion, the agency said.

It seems the pace of the Negative Watch or downgrade stories is picking up.

by Calculated Risk on 8/09/2007 03:03:00 PM

From MarketWatch: Big liquidation triggers hedge fund turmoil (hat tip barely and Gort)

The liquidation of a big hedge fund or investment bank trading portfolio is causing havoc in some parts of the hedge fund business, according to managers and investors.

Black Mesa Capital, a hedge fund firm that uses computer models to track down investment ideas, has told investors that at least one very large hedge fund or investment bank is liquidating "massive" trading portfolios, according to a letter the Santa Fe, NM-based firm sent to investors on Wednesday.

That's causing disruptions and triggering big losses among other so-called market-neutral hedge funds, Black Mesa said in its letter, a copy of which was obtained by MarketWatch on Thursday.

"Clearly, something is amiss in the markets that few in our strategy, if anyone, have experienced before," Black Mesa's managers Dave DeMers and Jonathan Spring wrote. DeMers declined to comment on Thursday.

The firm's hedge fund, which has about $1.9 billion in long positions and $1.9 billion in short positions, is down roughly 7.5% this month through Aug. 7. It could be down as much as 10% since then, Black Mesa noted.

From the WSJ: Blind to Trend, 'Quant' Funds Pay Heavy Price

Global Alpha, Goldman's widely known internal hedge fund, is now down about 16% for the year after a choppy July, when its performance fell about 8%, according to people briefed on the matter. The fund, based in New York, manages about $9 billion.

The fund's traders in recent days have been selling certain risky positions, according to these people. Early this week, those moves sparked widespread rumors on Wall Street that the entire fund might be shut down. A Goldman spokesman has said the rumors are "categorically untrue."

Campbell & Co., an $11 billion hedge fund that trades in the futures market as well as in stocks and bonds and is completely driven by such computer programs, was down 10% to 12% by the end of July.

From the WSJ: Second Goldman Hedge Fund Moves to Sell Some Positions

A second Goldman Sachs Group Inc. hedge fund has hit a rocky patch and has sold down some of its positions, according to a person familiar with the matter.

Goldman's North American Equity Opportunities hedge fund had $767 million under management earlier this year. The Fund was down over 15% this year, through July 27, according to investors and was down more than 11% in July alone. It is not known how much the fund has sold in recent days.
...
Tykhe Capital, a New York hedge-fund firm that manages about $1.8 billion, has suffered losses of about 20% so far in August, and is moving quickly to trim its investment positions, according to an investor in the firm briefed by Tykhe executives. The selling by Tykhe and a range of similar hedge funds is putting pressure on the holdings of a number of funds.

by Calculated Risk on 8/09/2007 12:02:00 PM

Quote added (hat tip dis):

So, today the monetary base in the North Atlantic economies is 7% higher than it was yesterday--an annualized growth rate of 2100% per year.

This is indeed a significant liquidity event...
Professor DeLong, August 9, 2007

From the WSJ: Fed Enters Market To Tamp Down Rate

The scramble for liquidity in Europe spilled over into the U.S. The federal funds rate, the rate at which banks make overnight loans to each other, was between 5.375% and 5.5% in early trading in New York, analysts said, well above the Federal Reserve's 5.25% target.

The Fed, in an effort to get the funds rate back down and meet the spike in demand for cash, lent $24 billion through its open market operations. It did so through two operations: A 14 day "repo," the name for an operation that adds reserves to the banking system and alleviates upward pressure on rates, and an additional $12 billion through an overnight repo. It is common for the Fed to do the two types of operations, but analysts said the amount added was relatively high, exceeding what it would have injected to cover expiring repos.

From the WSJ: ECB Injects €94.8 Billion To Ease Jittery Markets

Mounting fears that the U.S. subprime crisis is spreading to Europe prompted the European Central Bank to loan €94.841 billion ($130.2 billion) in emergency funds to European banks this morning, the first time it has taken this type of action since just after the terrorist attacks of Sept. 11, 2001.

Concern that European banks face growing losses on investments linked to U.S. mortgages shot the euro zone's overnight borrowing rates to 4.7% today, their highest since October 2001 and well above the ECB's benchmark financing rate of 4%.

From Bloomberg: Bank of Canada Says It Will `Provide Liquidity' to Aid Markets

The Bank of Canada said it will ``provide liquidity'' to support financial markets, the same day the European Central Bank lent money to ease a credit crunch that started with the U.S. subprime mortgage collapse.

The Ottawa-based central bank will ``support the stability of the Canadian financial system and the continued functioning of financial markets,'' ...

by Calculated Risk on 8/09/2007 10:49:00 AM

From MarketWatch: Consumers spent less as economic worries weighed

Retailers struggled ... in July as shoppers spent less while they grappled with economic anxieties and volatility that has rocked financial markets.

With nearly all of the nation's major retailers reporting sales results to the International Council of Shopping Centers, the cumulative gain stands at 2.6%, according to Thursday's data.

... the early results suggest that consumers across the board are far more concerned about credit and financing woes sparked by the slowdown in the U.S. housing market and the collapse of the subprime mortgage business.

"I had thought that we'd have a number that was better than this," said ICSC chief economist Mike Niemira. "Certainly the macroeconomic slowdown that we've seen since last summer has taken its toll on consumer spending -- directly through the housing channel and indirectly through the home-value concerns."

This is our first look at July retail sales. Following the sharp slowdown in the growth of Personal Consumption Expenditures (PCE) in Q2 - that many analysts blamed on gasoline prices - it will be interesting to see if consumer spending is slow in Q3 too.

The Census Bureau is scheduled to release the July advance monthly retail sales on Monday, August 13th.

by Anonymous on 8/09/2007 09:15:00 AM

I wish to observe that I have never advocated frittering away one's valuable productivity on reading those silly blogs on one's employer's time, on one's employer's equipment. You owe it to your employer to stick to Bloomberg.

That said, I get emails periodically from unnamed persons whose employers seem to be blocking access to all blogspot.com sites. I have been asked if there is any "work-around" for this. I know of none, but I love the idea of working around the the work rules for work-avoidance so that you can read a blog that is, as our commenters frequently point out, a lot of work to read, so I thought I'd open a thread for those of you who haven't alienated your IT people yet to possibly propose solutions.

My first idea was just to go the Sys Admin and show some leg, but I gather that doesn't work for everyone.

by Anonymous on 8/09/2007 08:47:00 AM

Says the MBA-in-Chief:

For his part, Mr. Bush, in a verbal tour of the current economic scene, was eager both to calm the markets and knock down the Democratic calls for the administration to intervene, predicting that the turmoil in the housing sector would end with a “soft landing” and would not damage the larger economy.

“I believe that markets ultimately look at the fundamentals of any economy,” Mr. Bush said. “And the fundamentals of our economy are strong. Inflation is down. Real wages are increasing. The job market is a strong job market. People are working. Small businesses are flourishing.”

Mr. Bush, who has a master’s degree in business administration from Harvard, confidently used phrases like liquidity, risk assessment and market adjustment to describe complex economic conditions.

Asked about collapsing housing markets, and the risk of them declining further, Mr. Bush said: “In a way it’s a necessary reaction to a flood of liquidity that came into the market in the past couple years.” That was financial jargon referring to the past several years of easy money, some of it from overseas, at low interest rates.

Mr. Bush said that as a result of the deep pools of money available, “housing got really hot” and that a decline was inevitable. He added that “if the market functions normally” it will lead to a soft landing. “That’s kind of what it looks like so far,” he contended.

by Anonymous on 8/09/2007 07:49:00 AM

From Bloomberg:

Aug. 9 (Bloomberg) -- The European Central Bank said it will launch an unlimited fine-tuning operation today to add liquidity at 4 percent after demand for cash in the European money market drove interest rates higher. . . .

Money-market traders are reporting a reluctance to lend money after concern over U.S. subprime mortgage losses roiled credit markets. That pushed overnight rates to as high as 4.7 percent today, compared with the ECB's benchmark refinancing rate of 4 percent.

``The underlying issue here reverts back to something we have mentioned before in that no one really knows how big the current credit problems are,'' said Charles Diebel, head of European rate strategy at Nomura International Plc in London in a note e-mailed after the ECB announced it's liquidity providing operation. ``This is undermining confidence in the system as a whole and hence the reaction this morning.''

BNP Paribas SA, France's biggest bank, halted withdrawals from three investment funds today because it couldn't ``fairly'' value their holdings. BNP joins Bear Stearns Cos. and Union Investment Management GmbH in stopping fund redemptions. Dutch investment bank NIBC Holding NV said today that it lost at least 137 million euros ($188 million) on U.S. subprime investments this year.

``There is a lot of uncertainty in the market about the subprime crisis and which banks may be affected by it,'' said Ina Steinke, a money-market trader at NordLB in Hannover. She added that overnight rates have fallen back to around 4.25 percent. ``Every bank is being suspected now, so no one is willing to lend money to anyone.''

by Anonymous on 8/09/2007 07:31:00 AM

This is the sort of thing that can help drive up the MBA Application Index:

Like Mr. Sanders, Joel Kaufman, president of Pittsburgh National Lending, works primarily with subprime lenders. When he saw problems developing in the subprime market several months ago, his South Side-based company changed its approach to getting customers qualified for loans. In the past, Mr. Kaufman would submit a customer's loan application to a single lender, then submit it to a different lender only if the first one did not work out.

Now, he said, "We like to submit our loans to at least three different lenders" from the outset.

by Calculated Risk on 8/08/2007 06:25:00 PM

Minneapolis Federal Reserve President Gary H. Stern spoke today: Comments on Release of the Nation’s Report Card: Economics 2006

... I regret to note that today we are again witnessing some painful and belated learning, by policy-makers and consumers alike, in our consumer financial markets.

As you are probably well aware, consumers today have access to a wide array of borrowing and savings options. In itself, variety is good, because it expands choice and opportunity. However, variety also fosters complexity, which challenges both consumers in their decision-making and financial regulators in their writing and enforcement of rules.

... I view consumer regulation and consumer education as substitutes. If consumers are more educated and able to make good decisions on their own, regulations can be narrower and more focused on clearly abusive practices such as deceit and fraud.

This is valuable, because as the scope of regulation widens, so does the cost. ...

... In some cases it is necessary and appropriate that we bear these costs in order to prevent even greater abuses elsewhere. However, regulation involves a tradeoff between preventing harm to some and allowing innovation, gains from trade, and free choice for others. At any given time, we write regulations as best we can to balance that trade off. Over time, however, we hope that better economic education will soften the trade off and allow us to rely more on the informed decision-making of consumers and less on formal restrictions.

Stern's subject was economic education. He appears to suggest policy makers overestimated the skills of American consumers, and therefore underestimated the need for more regulation - obviously referring to the housing slump.

This assertion seems absurd.

It was the policy makers who didn't recognize rampant speculation in the housing market. While we joked about "liar loans" here on Calculated Risk, the policy makers were congratulating themselves on the "ownership society". I'd argue home buyers who used no money down option ARMs were making a rational choice: they were balancing the odds of a big payday with little financial risk - if the property continued to appreciate - with the stigma of a foreclosure on their record. Obviously many home buyers felt the stigma was worth the risk. I don't see that as a lack of economic education, rather a rational choice given the circumstances.

But I can't think of a good excuse for the inaction of the policy makers.