At Least Oil Is Down Too

  • Bonds rallied yesterday a little, but have given back all that
    momentum and more today, so we’re back to where we were Friday on
    rates. At least oil is falling – we’re more than $18 off the high and
    still going.

  • There is a proposal out there being put together by a
    private/public consortium of mortgage people and government regulators
    that actually has some merit. It will be a couple of months before we
    get the full details, but right now it appears that what we’re looking
    at is a plan to increase transparency in the packaging of mortgage
    loans so they can be purchased. This would add confidence to the
    secondary mortgage market, increase liquidity, and probably drive down
    rates, especially for good borrowers.
  • This is the technical part, so skip it if you don’t care:
    mortgages are packaged in large groups for sale on the secondary
    market. Primary lenders have used this packaging to shed loans from
    the books and obtain new lending capital. However, up to the moment,
    the packages of loans have been fairly opaque; that is, the secondary
    financiers were never quite sure what it is they were buying. The
    packages of securitized loans were often significantly heterogeneous,
    and as the market has melted down, that has contributed to the
    distress, because the lending institutions that purchased these
    packages couldn’t really tell what they were worth – they didn’t know.

  • Some of the loans were fine, most of them, even, but many were
    not. How many? Nobody knew. Was this package better or worse than
    that one? Nobody knew. How much real exposure did the financier have
    to market downturn? Nobody knew.
  • To a large extent, nobody knows now, either, which is why the
    recent spate of better-than expected earnings from servicing banks has
    been such welcome news. At least we’re pretty sure the entire
    portfolio isn’t going to self-destruct.
  • This opacity does two things: one, it increases risk-based
    pricing for good loans (20%+ equity, 720 credit, full income
    documentation) while significantly decreasing pricing for bad loans,
    and two, it allows lenders to make riskier loans, because they can then
    package them with good ones and sell the whole shooting match as “A”
    credit mortgages.
  • You’re right, this is stupid.
  • What this proposal would do, then, is make it much easier for an
    investor to tell what he was buying, because all the loans in any given
    package would share characteristics. This will increase liquidity,
    especially for good borrowers, and get some money moving in the
    mortgage market again. Rates will fall for less risky loans.
  • Rates will, of course, rise for more risky ones, which will
    emphasize things that need emphasizing, like having a job and some
    money in the bank, and a history of paying bills on time. That will be
    painful for some, but better on the whole for everyone.
  • Congress will then step in and prohibit risk-based pricing as
    being discriminatory, and the entire market will collapse. But we will
    have made a good try, and that’s important.

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