Housing Bubble Bursting?

[Randolph Kinney]

jBanks & financial institutions next big write down

Bond-insurer woes may trigger more write-downs, turmoil

Doubts on AAA ratings for Ambac, MBIA spark turmoil in muni bond market

'The destruction of the bond insurers would likely bring write-downs at major banks and financial institutions that would put current write-downs to shame.'
— Tamara Kravec, Banc of America Securities

SAN FRANCISCO (MarketWatch) -- Just when you thought it was over, trouble in the $2.3 trillion bond-insurance business could trigger another wave of big write-downs from banks and brokerage firms, experts said Friday.

Bond insurers agree to pay principal and interest when due in a timely manner in the event of a default -- a $2.3 trillion business that offers a credit-rating boost to municipalities and other issuers that don't have AAA ratings. Without those top ratings, their business models may be imperiled.

A more worrying consideration is that when a bond insurer is downgraded, all the securities it has guaranteed are, in theory, downgraded as well.

If Ambac and MBIA lose their top ratings, billions of dollars of muni bonds will be downgraded, and the guarantees that have been sold on mortgage-related securities such as collateralized debt obligations, or CDOs, will lose value.

Bond insurers guarantee roughly $1.4 trillion worth of muni bonds and more than $600 billion of structured finance securities, such as mortgage-backed securities and CDOs, according to Standard & Poor's. Ambac alone has guaranteed about $67 billion of CDOs.

 

[Randolph Kinney]

Originate and distribute mortgage model not sustainable

Weekend Edition: Credit crisis looms large over annual Davos summit

LONDON (MarketWatch) - With the world's financial markets teetering on the brink of panic, the world's most powerful executives, financiers and politicians will be searching for answers to the global credit meltdown when they gather for their annual retreat next week in the Swiss Alps.

The annual meeting of the World Economic Forum in Davos isn't designed to produce detailed policy proposals, but participants say it will provide a platform to take a look at what went wrong. And front and center will be a look at how the practice of selling mortgages to home buyers and then re-packaging them and selling them as securities to other institutions got so out of hand on a global scale.

"I think there will be a high level debate on whether the 'originate and distribute' model now prevalent in financial markets is sustainable," said Howard Davies, director of the London School of Economics and Political Science. "That's the high-level politico-economic question."

 

[Austin]

I was just updating my USPAP and regulatory material and ran up on this quote which is the basis of Federal reserve Board 12 CFR 225 Subpart G:

FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket No. R-0990]
Real Estate Appraisals
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of Proposed Rulemaking.

SUMMARY: The Board of Governors of the Federal Reserve System is soliciting comments on a proposed amendment to Subpart G of the Board's Regulation Y, Appraisal Standards for Federally Related Transactions, to exempt any transaction involving the underwriting or dealing of mortgage backed securities from the Board's appraisal requirements. This amendment would permit a bank holding company or a nonbank subsidiary of a bank holding company engaged in underwriting and dealing in securities (a so-called section 20 subsidiary) to underwrite and deal in mortgage-backed securities without demonstrating that the loans underlying the securities are supported by appraisals that meet the Board's appraisal requirements.
The Board is proposing this amendment to address concerns raised by bank holding companies regarding the inability of section 20 subsidiaries to actively participate in the commercial mortgage-backed securities (CMBS) market due to the appraisal restrictions of Subpart G.

If anyone in the media is reading this thread to see what is going on, that should help you understand a little better.

 

[hastalavista]

Autsin-

For clarity, does this proposal mean something like this:

If you are a bank and regulated by us (FRB) and engage in underwriting MBSs, then we are considering allowing you to do so without the requirement to ensure the loans contained in the MBSs are supported by appraisals.
So, if you want to write MBSs, up to now, we have required that you demonstrate the loans in those MBSs were based on appraisals. We are thinking about removing this requirement.

Is that the gist?

 

[Austin]

http://www.federalreserve.gov/boarddocs/press/BoardActs/1997/19971205/R-0990.pdf

Here is the link. You guys read it and decide.

PS: Does this help explain off balance sheet dealings? If the bank can't do the deal, create a holding company and let them do it.

It is my understanding this was done 10 years ago and it has been place for 10 years. It is dated 1998.

PS2: I just had to add this section from the link:

The Board believes that permitting section 20 subsidiaries to underwrite and deal in mortgage-backed securities without obtaining appraisals that meet the Board's appraisal requirements will not lead to substantial losses for bank holding companies or pose a systemic risk to the banking
system. The Board notes that section 20 subsidiaries have the expertise necessary to evaluate the credit risks involved in underwriting and dealing mortgage-backed securities. In this regard, the Board notes that, section 20 subsidiaries are subject to an operational and managerial infrastructure
inspection prior to being permitted to engage in corporate underwriting. Periodic inspections verif that proper underwriting and risk management procedures are in place.When a section 20 subsidiary serves as lead underwriter, it is responsible

 

[hastalavista]

http://www.federalreserve.gov/boarddocs/press/BoardActs/1997/19971205/R-0990.pdf

Here is the link. You guys read it and decide.

PS: Does this help explain off balance sheet dealings? If the bank can't do the deal, create a holding company and let them do it.

It is my understanding this was done 10 years ago and it has been place for 10 years. It is dated 1998.

PS2: I just had to add this section from the link:

Ok, thanks, I did just read it and I understand the context that this was 10-years ago.
I don't think it explains SIVs although it might have helped in creating a friendlier environment for SIVs to be created.
I think it examples unintended consequences of multi-dicing/slicing of MBSs,CDOs, etc. When any entity can repackage and off-load risk to the next entity downstream, they are going to become less risk averse and more aggressive.... until the stream gets plugged up. Then they are left holding the proverbial bag.
In this example, FRIs who were required to underwrite loans that were supported by appraisals, were then allowed to manage that risk in some other way if they found it prudent to do so. Unfortunately, they acted imprudently instead. :new_smile-l:

 

[Restrain]

As an aside, with CA's unemployment rate, SC unemployment rate hit 6.6%.

However, unemployment does not consider those who were laid off and did not have unemployment insurance, who did not register with the state unemploynment commissions, who closed their small businesses.

I submit that unemployment is pushing double digits, not including those who are underemployed.

 

[JSmith43]

As an aside, with CA's unemployment rate, SC unemployment rate hit 6.6%.

However, unemployment does not consider those who were laid off and did not have unemployment insurance, who did not register with the state unemploynment commissions, who closed their small businesses.

I submit that unemployment is pushing double digits, not including those who are underemployed.

Unemployment rate was calculated by survey. I remember the question set. But, I guess I haven't checked in 30+ years. Unemployment filings is a separate statistic and not used in the unemployment percent calculation as far as I know.

Has there been a policy change I slept through?

 

[Marcia Langley]

Unemployment rate was calculated by survey. I remember the question set. But, I guess I haven't checked in 30+ years. Unemployment filings is a separate statistic and not used in the unemployment percent calculation as far as I know.

Has there been a policy change I slept through?

Several!

I don't know about the basic data sourse for the official figures but the changes to the method of calculation has been a newsworthy item periodically over the last 30 years. Each time it has resulted in the numbers looking better.

 

[JSmith43]

Several!

I don't know about the basic data sourse for the official figures but the changes to the method of calculation has been a newsworthy item periodically over the last 30 years. Each time it has resulted in the numbers looking better.

Sorry, Marcia, you made me curious enough to check. Same basic methodology that I learned......40 years ago in Econ.

National Unemployment rate is computed from the Current Population Survey (CPS) of appx: 60,000 households. It is done by the Census Bureau. Residents are interviewed. Based upon the responses to the survey questions, the Bureau of Labor Statistics estimates the size of the labor force and the number that aren't employed.

Some states and other smaller units of government no doubt take short cuts to develop their own estimated unemployment rate.

I'm glad the macro-economic statistics are developed essentially the same way. Results may vary over time based upon the attitude of the population regarding the question set. That is problem enough!