Seattle Bubble Forum Archive

The Wall Street Journal is reporting that a major industry-wide agreement to work-out issues with sub-prime mortgages coming up for resets will be announced next week.



If this kind of concerted industry action occurs, it would seem to greatly change the curve of the reset wave many analysts have been watching. Couldn't this provide a boost to the real-estate market? Far fewer people will be forced into foreclosure by a sudden rise in their payments. Fewer foreclosures would have to be positive.

On the other hand, I don't see how this would make the underlying securities backing these mortgages any more attractive. If anything, investors might want to discount mortgage securities even more if they feel the terms governing them can arbitrarily change.

And let's forget about this kind of plan re-kindling interest in new mortgage securities.

Still, on the whole such a massive re-work program might slow down price declines in the next year or so.

Interesting topic. On the one hand, it seems like a bailout would help stabilize prices, but I've just about convinced myself that I don't believe it. Ignoring conventional wisdom, here's what I see.

Supply is already at nearly 1 year, which is just ridiculously high. I believe consensus is that this has happened prior to the largest wave of defaults. Say a bailout was highly successful and prevented 1/2 of all defaults which would otherwise occur. I don't see how this number will be too different from what we saw in 2007, and there was a significant rise in supply against demand for 2007.

Taking foreclosures off the market might stabilize price declines a little, but it would also stabilize rental prices. You're taking people who would have been forced to rent and locking them into a house instead. This effects rent-vs-buy calculations.

How will this make loan originations easier? We all know that it was the easy money more than anything else that drove this bubble. The easy money is drying up. You hear the words credit crunch thrown around, but I don't think they are accurate. The point is if you need 20% to buy, there will be no buyers in NYC, San Fran, San Diego, Seattle, etc. So if the entire industry is subsidizing bums who can't pay their real rent, why would they go back to loaning to those people again?

I think this whole thing is just a boondoggle now. If it happens, maybe nationwide prices decline only 7% next year instead of 9%. If that's what the industry has to look forward to, they'd better start drinking the crazy juice today.