Sorry Doug. I did not mean to imply that you
were only looking at anxiety and animal
spirits. It is just that the numbers that you
cite, which as always are in far more detail than
most of us academic guys seem to have at our
finger tips, seem to indicate a relatively small
hit on the total value of outstanding MBSs. My
question was trying to get at some of the detail
of how all this fits together. Obviously the
markets see it as a very big deal, so these
numbers must get magnified in some way.
Doug Orr
Date: Tue, 28 Aug 2007 13:07:17 -0400
From: Doug Henwood <[EMAIL PROTECTED]>
Subject: Re: [PEN-L] a data question about the credit crisis
On Aug 28, 2007, at 12:47 PM, Doug Orr wrote:
Since ai am a bit behind in reading PEN-L (about 18,000 messages), I
did go back over the past few weeks and found Doug Henwood's new
piece from LBO. In that he seems to indicate that most of the
problem is "animal spirits" , anxiety and panic.
No, that's not what I said. Here's some of what I did say:
<http://www.leftbusinessobserver.com/Turmoil.html>
But the distress in the mortgage business is highly unusual for a
period when the economy is in relatively decent shape. According to
the Mortgage Bankers Association (MBA), foreclosures were started
on 0.58% of outstanding mortgages in the first quarter of 2007
(well get second quarter figures in September). That may not sound
like much, but its the highest on record, surpassing the previous
0.50% high set in 2002, when the job market hadnt yet recovered
from the recession. (Itd be nice to graph all these numbers, but
the MBA doesnt allow it.) This is largely being driven by the
subprime problem. The overall delinquency rate, at 4.84% isnt high
by historical standards, but those seriously
behind on their bills 60 to 90 daysare 1.91%
of those outstanding, very close to a
record, surpassed only by 1986s 1.98%. But in 1986, the
unemployment rate was around 7%, vs. 4.6% now, and the average
interest rate on a new mortgage was around 10%, vs. 6.7% now.
If the unemployment rate continues to drift higherand all
indications are that the Federal Reserve would like it tothen the
delinquencies will certainly rise, especially as the teaser
mortgage payments reset higher. And if house prices continue to
decline, as seems likely, then a lot of people whod hoped that
they could sell or refinance are going to find themselves owing
more than the dwelling is worth.
[...]
Although the subprime market is only a small share of the total
mortgage market, and although subprime loans in default are only a
small share of the subprime universe, the rising default rate on
these loans has created a seemingly disproportionate amount of
anxiety. Part of the reason for this is that, thanks to
securitization and the mysterious ways of CDOs no one really knows
who holds what or how dangerous supposedly safe securities will
turn out to be. It may take time for all that to make itself clear.
And if the underlying problem borrowers inability to make their
mortgage payments gets worse, than the fear and uncertainty will
also get worse.
But thats not all. Wall Street has been very casual about risk in
recent years. Repealing much of financial history, the gap between
interest rates on junk bonds and other risky instruments has been
only slightly higher than that on riskless assets like Treasury
bonds. Investors poured money into buyout funds, hedge funds, and
anything else that promised high returns without much consideration
of the possibility of loss. The subprime mania could be read as a
subset of that complacency. The subprime crisis can be read as the
end of that complacency.
