Posted on 06/22/2016 8:35:08 PM PDT by Lorianne
“Astronomical” default rates and losses.
The New York Fed just warned about the ticking mortgage subprime time bombs once again being amassed, and what happens to them when home prices decline. But unlike during the last housing bust, a large portion of these time bombs are now guaranteed by the government.
Subprime mortgages are what everyone still remembers about the Financial Crisis. They blew up has home prices fell. Folks who thought they were “owners with equity” found out that they were just “renters with debt.”
And they dealt with it the best they could: forget the debt and the rent and stay until kicked out. Cumulative default rates on subprime mortgages spiked to 25% in 2007, according to the report. Banks ended up with the properties and collapsed. Mortgage backed securities based on these subprime mortgages imploded. Bond funds that held them imploded. All kinds of fireworks began. While subprime mortgages didn’t cause the Financial Crisis by themselves, they were an essential cog in a crazy machinery.
Now, the machinery is even crazier, subprime mortgages are even bigger, and mortgage-backed securities, chock-full with subprime, are hotter than ever. Only this time, the taxpayer is on the hook.
During the prior housing boom, from 2000 through 2005, government mortgage insurance programs covered less than 3% of all subprime mortgage originations, while private mortgage insurers covered over 20%.
But during the housing bust, private insurance of subprime mortgages dropped to essentially zero. And the government – through various programs by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the USDA’s Rural Housing Service (RHS) – stepped in to pick up the baton, plus some, insuring subprime mortgages with a vengeance. By 2009, the government insured nearly 35% of new subprime mortgages. More recently, it still insured about 22% of new subprime mortgages.
The NY Fed’s chart below shows the plunge in privately-insured subprime mortgages (red line) during the housing bust, and how the government (blue line) piled into this business:
chart at source
(excerpted)
Time to sell my winter house in Arizona. Hope the market holds until April of next year.
This is so appalling.... the squalid elites that rule us continue to f### everything up so badly.
Our monetary system has been captured by progressives, social-engineers and their cronies on Wall Street.
Our currency is unbacked by anything - so it can be printed at will. We have a Federal Reserve that can create debt at will and manipulate interest rates, to support the massive nanny state.
Conservatives will lose all political and social battles with the left as long as we have a captured financial system and fiat currency.
” We have a Federal Reserve that can create debt at will and manipulate interest rates, to support the massive nanny state.”
Congress creates the debt. The Fed can monetize it, not create it.
The Fed can set the shortest term interest rates, the overnight loan rate to banks. The bond market and bond vigilantes determine long term rates.
We've had this discussion before, haven't we? What incentive is there for politicians to control spending if the Fed is going to buy the debt, or create 0% money for Wall Street to buy it? I assure you - when the next recession hits and the US Gov't budget deficit hits $1.5 Trillion, the Federal Reserve is going to be buying massive amounts of Gov't debt in the name of its "mandates" and stabilization.
As to interest rates, the Fed directly sets short term rates, but especially over the last 7 years, has intervened directly to push down long term rates. Its "Operation Twist" bought long-term bonds and sold short-term. Its massive purchases of GSE had the direct effect of pushing down long-term housing interest rates. To say "the market" determines long term rates is disingenuous, when the Federal Reserve IS the market.
“We’ve had this discussion before, haven’t we? What incentive is there for politicians to control spending if the Fed is going to buy the debt, or create 0% money for Wall Street to buy it?”
Don’t recall discussing it before but it’s possible.
The Fed used to be prohibited from buying debt directly from the Treasury. They could only buy it on the secondary market. Don’t know if that’s been changed. Of course the real trouble was created when Nixon cut the last link to gold which served as an outside brake on credit creation.
” To say “the market” determines long term rates is disingenuous, when the Federal Reserve IS the market.”
The bond market is much bigger than even the Fed, and the Bond Vigilantes can discipline the Fed if they choose to do so as they demonstrated many times in the 70s. My assumption is that bond traders are okay with what the Fed has been doing or they would be refusing to buy Treasuries at such low rates.
This has Mel Watts’ fingerprints all over it.
“Now, the machinery is even crazier, subprime mortgages are even bigger, and mortgage-backed securities, chock-full with subprime, are hotter than ever.”
Mortgage note buyers are only offering 55 cents on the dollar as of two weeks ago. On a seasoned $100,000 note, they’ll pay you $55,000. That’s ridiculous.
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