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America’s housing system still has not been properly reformed

economist.com

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Re: America’s housing system still has not been properly reformed

#81

Post by bluGill »

huherto wrote: post #23
chollida1 wrote: post #4

I'd agree that the US housing and derivatives markets are in a much better position than in 2007-2008. Atleast people who are getting mortgages now have some form of documentation, and risk manages are being asked to do their jobs. The crisis now is that, and this is just my opinion, low rates are here to stay. with the amount of money in the system, people are being priced out of homes and as time goes on the amount…

Nice comment. Food for thought. How big was the risk that they took ? Surely they knew that the market was insane. But would they have lost a lot of money if the market was insane for a long time ? I saw the movie but I don't remember a lot of the details. I was just trying to follow.

Yes, but unlike a normal short their loss was limited. They had (IIRC) a 7 year contract to pay $25million/year unless things went bust in which case they get paid $1 billion. So their worse case was a $175 million loss, their best case was a billion gain. If you have the money the potential return on invest is great.

I'm about half way through the book now, but I don't have it handy at the moment to look up the real numbers though.

Re: America’s housing system still has not been properly reformed

#82

Post by woodandsteel »

cylinder wrote: post #16

The fact that we were not able to ban mortgage securitization after the crisis is appalling. IMO this is the root of the problems. Make banks hold their loans on their balance sheets! I also think the point about banks having capital buffers is laughable and not logical. It's like claiming we've solved chronic migraines because we have a stash of Tylenol. The cause has not been eliminated. And let's say there's a cri…

>The fact that we were not able to ban mortgage securitization after the crisis is appalling. IMO this is the root of the problems. Make banks hold their loans on their balance sheets!

Absolutely. The problem is that mortgages have become speculative instruments, with the profit privatized and the risk socialized. The old system was far more stable.

Re: America’s housing system still has not been properly reformed

#83

Post by MollyR »

davidw wrote: post #80

NIMBYism is already putting places like Palo Alto, Boulder, etc... well out of reach of the middle class, with a class of "haves" that live there, and "have nots" who have to drive in to work. What would happen to this situation if you killed the subsidy off? What would it do to the dynamic between generations: older people got a big leg up, and you get nothing?

It would cause alot of anger. I hear a lot of hatred at work towards the baby boomers about everything

Re: America’s housing system still has not been properly reformed

#84

Post by n00b101 »

lintiness wrote: post #67
n00b101 wrote: post #44

The simplest approach would be ... The nationalised mortgage firms that guarantee the bonds ... should be forced to raise their capital buffers and increase their fees Raising capital requirements seems like a minor tweak, a band-aid cure. I would argue that the systemic risk could better be managed by changing the fundamental economics of the financial instrument in question: the classic residential mortgage. I'm su…

the "protection" against negative equity is the down payment. negative equity only matters if incomes take a hit and sales are forced.

The down payment is equity, it's not really the same as protection. Although the higher your down payment, the lower your leverage risk. Let's say you put $100k down to purchase a property for $500k (i.e. you borrow $400k). If the property value falls to $400k (20% drop), your entire equity is wiped out. If you sell the property, the proceeds go to the bank to pay back the loan, and you have lost 100% of your the original $100k down payment ... This is due to leverage. If the property value falls below $400k, then you are in a negative equity situation ... Get deep enough into negative equity and it becomes rational for some people to just default and "walk away."

Re: America’s housing system still has not been properly reformed

#85

Post by roywiggins »

talmand wrote: post #59
lmm wrote: post #36

Earlier quoted context omitted.

IIRC from reading the book a year or two ago, one of them's bosses were hounding him for the premiums he was paying on the insurance-like contracts he bought, which was something like $25m/year. When the crash happened they bought in ~$1b. Had there not been a crash he would have got nothing (the contracts would never have paid out) and that $25m/year would have been money down the drain.

Shorting is a risk. Shorting with big money is a big risk. In this case though, my impression is that certain people who actually looked at the data knew it would happen. Not like "I think it will happen", it was "it will happen sometime in this month of this year" kind of thing. Because they knew when those stupid ARMs would kick in with their adjustable rates on top of the obvious number of failed mortgages. The ri…

The other risk was that the entity on the other side of the bet would be wiped out in the crash and not be able to pay out.

Re: America’s housing system still has not been properly reformed

#86

Post by roywiggins »

mcnees287 wrote: post #18
komali2 wrote: post #10

Earlier quoted context omitted.

I'm still confused by the CDS bit. Is there a good eli5 article on it? I've already checked the eli5 subreddit and couldn't find anything specifically on the mechanism that allowed shorting.

It's just insurance. One side pays the other side if a certain outcome occurs. In exchange for protection from the outcome, the side seeking protection pays a fee.

It's more like buying insurance on someone else's house, when you know they are a meth lab and the insurer doesn't.

Re: America’s housing system still has not been properly reformed

#87

Post by mjevans »

chollida1 wrote: post #21
komali2 wrote: post #10

Earlier quoted context omitted.

I'm still confused by the CDS bit. Is there a good eli5 article on it? I've already checked the eli5 subreddit and couldn't find anything specifically on the mechanism that allowed shorting.

Sure. The short answer is..... You(party A) and party B have a contract. You want to eliminate the risk that Party B goes bankrupt and can no longer pay you. You go to party C who will take small payments from you each month/quarter and in return they will pay you if party B goes bankrupt. Now the important things to note are: 1) The amount you pay party C is based on how you and party C analyze the bankruptcy risk o…

Why is that type of betting (gambling) allowed? That's just plain insanity.

Re: America’s housing system still has not been properly reformed

#88

Post by tedunangst »

dzdt wrote: post #32

Partly because the state charges too little for the guarantees it offers, taxpayers are subsidising housing borrowers to the tune of up to $150 billion a year, or 1% of GDP. The original post makes this claim without any citation. I don't think it is correct. Recent stress-test reports on Fannie and Freddie show that, even making provisions for future bailouts in the stressed scenario, the agencies are profitable to…

It's possible to turn a profit while still selling something too cheaply. The claim (as I understand it) is that leaving money on the table is tantamount to giving it away.

Re: America’s housing system still has not been properly reformed

#89

Post by tedunangst »

cylinder wrote: post #16

The fact that we were not able to ban mortgage securitization after the crisis is appalling. IMO this is the root of the problems. Make banks hold their loans on their balance sheets! I also think the point about banks having capital buffers is laughable and not logical. It's like claiming we've solved chronic migraines because we have a stash of Tylenol. The cause has not been eliminated. And let's say there's a cri…

The complication here is that local banks do not always have sufficient capital to finance all the mortgages in a growing community.

Re: America’s housing system still has not been properly reformed

#90

Post by hx87 »

jazzyk wrote: post #72
pessimizer wrote: post #56

Earlier quoted context omitted.

It's important to mention that they've been saying that for 7 years now, and that Alan Greenspan has been wrong about everything. We haven't even been able to get inflation up past 1.7%.

Agree on Greenspan, but do you really believe that the inflation rate has been 1.7%? Actual inflation is estimated to be anywhere from 3-7%, depending on the source. The Fed, setting interest rates way below the actual inflation, is actually taking money from savers and retirees (rather than rewarding them), or forcing them to be reckless with their money by investing in principal-at-risk investments (which they shou…

If you live in a growing but development-constricted city, housing inflation alone would bring your personal inflation rate above 3%, but besides that (e.g. if you live in Houston) the prevailing inflation rate is still low.
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