Posted on 08/15/2007 6:11:20 PM PDT by Kaslin
Actually the Fed doesn’t print money, but if it did that would be inconsequential. Currency is the tiniest fraction of the money supply.
The Fed acts by supplying credit to the banking system. They do this largely by purchasing Treasury bills from banks. This time they may have been purchasing government backed mortgages rather than Tbills.
Repos are short term but today the Fed was doing more. There’s no limit to rolling them over that I know of. Repos cost banks money and they aren’t happy about doing them. It’s a sign that they aren’t able to raise money from other sources, and it’s very likely a sign that they cannot find anyone willing to purchase a CDO or MBS from them. They turn to the Fed only because they can’t find another way to get liquidity.
There is a very real problem with the collaterallized mortgage market and its derivatives. There never was much of a market for trading them so there was no way to price them to market. They were priced to a model, and the model is seriously flawed. Its parameters were based on real estate not going down and on borrowers not defaulting on their payments.
Well, welcome to the real world. Hedge funds invested in CDOs are blowing up. Mortgage originators cannot find a market to lay off their loans. Banks can’t find buyers for the mortgage paper they hold, and they loaned money to some of the now exploding hedge funds. Take a look at that Credit Suisse reset graph. The fun is just getting started.
The graph is pretty scary. I purchased my first house (a new townhouse in fact) in March 2005 here in GSO, NC. Market here never got very hot. A lot of people I know, especially my Raleigh friends, all got 100-103% mortgages, many with < 620 credit scores. Never did understand how they all qualified at 6% apr with those scores and nothing down. Many got ARMs too, including my in laws, although they at least put 25% down. I put 10% down and got a 30 yr fixed and send in about $50 extra a month. Housing prices here seem to be stagnant over the last 2-3 years. Maybe 2% y/y increase. (for what it’s worth, none of my friends are even close to defaulting)
If you’re not in a bubble zone and you have a conventional mortgage you may not be affected too much. In southern California we have a front row seat for mortgage craziness, along with Florida. Prices here could easily fall 50%.
Those points are valid, but minute. The sub-prime part of the problem is tiny.
The much larger part of the problem is the dead Secondary market.
The banking world ends in the next 60 days if there is no Fed rate cut. Further cash injections by the Fed are mandatory at this point, as well.
...and the sub-prime lenders are toast no matter what. No bail out can save them at this point. What I'm talking about is saving the rest of the U.S. outside of the sub-prime speculators.
FDIC insurance reserves are grossly insufficient to save the savings of those who will lose it all if the banking world repeats 1930.
If that happens, you wonder if many folks will worry about being thrown out of their homes/etc - many, many people could be in the same situation at the same time.
His father bailed out the Savings & Loan industry, the son will bail out the mortgage industry. I've no doubt he has too many friends who will loose too much money if he doesn't.
Good time to buy. Iffy time to get a mortgage to buy it with.
I feel your pain.
Amen! It is the government that pushed the lending envelope in the first place. Their thrust was to "encourage" lenders to lend based on racial quotas rather than the size of the down payment and the credit-worthiness of the customer. A recipe for disaster.
One question I have is if the fed did cut rates its possible it could have the opposite effect. For example the consumer price index is running at 4.5% yoy right now, and the fed rate is 5.25%. Hardly even keeping an investors head above water.
If the fed lowered rates from here, an investor must assume a more rapid growth in the money supply. For example the yoy cpi could increase to 5.5%, and say they dropped the rates a full percent to 4.25%. Now the investor is losing money investing.
Won’t the investor, and I’m talking sophisticated investors here like major banks, sovereign wealth funds, billionaires, fund managers.. Won’t the investors just demand a higher spread to compensate for the increased risk of inflation?
Btw I agree with you the problem is very serious.. I just don’t see a clean way out of it. I see one way is massive financial bankruptcies, sort of like how the airline industry went down.
If you have 5% down, verifiable income, and a decent credit score, it’s still doable rather easily. Don’t let the media fool you.
Prices in some markets may fall a bit more.
However, if you find a bank REO, you could probably get a good enough deal to weather it even if prices dipped a bit at first.
More like a 5-cent dollar becomes a 4.8 cent dollar.
How can we live within our means IF WE HAVE 25% UNEMPLOYMENT??? That’s the kind of scenario that could happen if you and the other “better-than-you” doomsayers get your way.
I agree. The Fed made a small token to the positive last week. They need to do more.
You have a source for this number?
If the Fed doesn’t do more, then paper doesn’t get rolled over, and if the major lending institutions can’t roll their paper, then there will be no new loans, period.
Game over.
It’s not too late for the Fed to avert this crisis, but the clock is ticking.
>How can we live within our means IF WE HAVE 25% UNEMPLOYMENT??? That’s the kind of scenario that could happen if you and the other “better-than-you” doomsayers get your way.<
As long as lenders are so stupid as to give loans to people who do not qualify for them, and as long as people live on credit rather than cold, hard cash, we skate on thin ice economically.
I said that corrections can be healthy. Government should not interfere in the market. If people make bad decisions, it is not up to Government to step in, or people never learn their lesson. You snidely call it doomsday. I call it common sense. And I was a Depression baby!
So in other words, you’re retired and unaffected by this.
What about me, age 30 about to get married and start a family?
I’ll be thinking of wise Paperdoll as we sit next to our dumpster eating discarded Burger King food.
;-)
Exerpt: The President also believes that government alone can't close America's homeownership gap. It is critical that our government challenge the private sector to take concrete steps to tear down the barriers to homeownership that face minority families. The President is issuing "America's Homeownership Challenge" to the real estate and mortgage finance industries to join in his effort to increase the number of minority homeowners by 5.5 million families by the end of the decade.
I went through some very rough times due to governmental bailouts when I was raising three children as a real estate broker. It wasn’t fun, but I got through it. You will, too, should it come to that, RR. Faith helps! :)
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