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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

#121

Post by erichocean »

jdmichal wrote: post #113
erichocean wrote: post #101

Earlier quoted context omitted.

It's not betting (gambling), it's insurance . Is insurance insane?

How could you call it insurance when you have no interest in the original security? What are you insurance against?

@jkimmel is 100% right: You don't need to be a direct party in a contract to be affected by it. Here's another example:

I buy a house at a higher-than-usual price for the area, expecting its value to increase because of some development that is occurring nearby—an automotive manufacturer has recently agreed to build a plant about 10 minutes away, creating around 2000 jobs in the area.

However, the deal still needs to be approved by the Feds. If I wait until the approval, the house might cost even more to buy and potentially make my investment unprofitable (or not profitable enough). But if the plant is not approved, my house will likely not gain enough in value and I will have paid too much.

To insure against the Feds not approving the plant, I can by a CDS against that risk. I will lose a small amount of profit in my eventual sale of the house to pay for the CDS, but will also prevent a large (profit) loss in the event that the plant is not approved.

Note: In this example, I do not have any direct interest in the (future) plant, or the auto manufacturer, and I obviously do not control the actions of Federal regulators. Nevertheless, I am exposed to risks (and benefits!) taken by them as a homeowner in the area, and a CDS can be used to insure against those risks at minimal cost.

Admittedly, this is fairly sophisticated for an individual homeowner, but this kind of thing is routine for financial professionals. CDS is a kind of insurance, and it's totally legitimate, even though you are usually not insuring something you have a direct interest in.

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

#122

Post by internaut »

eli_gottlieb wrote: post #94
bradleyjg wrote: post #37

Earlier quoted context omitted.

Why does the government need to be involved in mortgage lending at all? Is there a specific market failure inherent in it people can point to that calls for government intervention to overcome (akin to the public good failure for e.g. roads)?

Homeownership was a major pillar of post-WW2 cultural stability among the middle class, so subsidizing it was considered a social good.

Cringed while reading. We've got to stop transcribing intuitions into universal laws if we want to claim the sapiens in homo sapiens.

Regardless of political stance, for any animal to require half its lifetime in effort to acquire a shelter, well that is retarded. And for some reason we consider ourselves more enlightened than our ancestors building functionally useless monoliths. At least the pyramids united the tribe or whatever.

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

#123

Post by internaut »

grandalf wrote: post #42

One other thing to keep in mind is that there was a great boom in building in the US during the 1970s and 1980s, and many of the homes built during that period were built using substandard building materials and techniques, many of which are no longer up to code for new construction but were grandfathered in. How many of those millions of homes are actually solid, reliable structures? How many suffer from moisture da…

> I think we'll start to see a gradual crumbling/disintegration of suburbia as the houses fall into disrepair and the mortgage debtors are in too far over their heads to afford proper maintenance.

This hits the nail on the head.

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

#124

Post by internaut »

MollyR wrote: post #83
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

Niall Ferguson called this several years ago.

http://www.telegraph.co.uk/finance/financialcrisis/9338997/R...

His Reith Lectures on the subject (Burke's social contract and its implications today) are worth putting into your mp3 player.

Ctrl-F niall

http://www.bbc.co.uk/programmes/b00729d9/episodes/downloads

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

#125

Post by cmdrfred »

talmand wrote: post #60
martincmartin wrote: post #7

Earlier quoted context omitted.

Honest question: how many of them reverted to mean afterward [0], that is, thought they saw other things coming, bet on them and were wrong about as often as everyone else? John Paulson wasn't featured in the movie, but fit the bill. But I don't know about those in the book/film. [0] https://en.wikipedia.org/wiki/Regression_toward_the_mean

If I remember correctly one of them closed down his fund because he was stressed and tired of his clients always second guessing him through the whole thing. Then begin to second guess him again on his next decisions despite being right the first time and bringing in hundreds of millions of dollars in profit.

I believe he is investing in water now if the end of the film is correct. Let's hope he isn't right twice.

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

#127

Post by infinite8s »

rsync wrote: post #76
chollida1 wrote: post #21

Earlier quoted context omitted.

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…

You're missing the very best part ... in many cases, the C parties allowed customers to assemble their own CDS specifically containing the very worst segments of the contracts between parties A and B (to stretch your analogy).

It's not an analogy - you are confusing the difference between CDS (which is what chollida1 described) and MBS (a type of collateralized debt obligation the is pooled together and various buckets of risk are tranched and securitized, which is the aspect you describe).

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

#128

Post by lintiness »

n00b101 wrote: post #84
lintiness wrote: post #67

Earlier quoted context omitted.

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 ori…

very few non-recourse loans in the housing market these days. a 20% decline in housing prices, and there's limited - zero systemic risk (ie the banks via linked derivatives that the author's so worried about); only the owner loses.

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

#129

Post by fathom »

evanpw wrote: post #49
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…

This stress test is assuming credit losses about a quarter of the size of the stress test 2 years ago, and much smaller than the last crisis (0.56% vs. 2% vs. 1.4%). Does anybody know if something has structurally improved in the Fannie/Freddie portfolios, or whether the testers are just less pessimistic than they were 2 years ago? [1] http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2016_DFA... [2] http://www.fhf…

If anything this [1] article would lead the reader to believe since Fannie/Freddie are now spearheading the leading charge their portfolios are further out of line with the market reality.

[1] http://www.economist.com/news/leaders/21705317-americas-hous...

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

#130

Post by fathom »

woodandsteel wrote: post #82
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.

The old system gave us the savings and loan crisis. Is it fair to say the alternative is to recognize that for many homeownership simply is not an option?
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