4 ms·
While this may sound reminiscent of the 2008 crisis, I think there are some important differences according to the article: In 2008 the fundamental problem wer
by t_mann 4y ago
While this may sound reminiscent of the 2008 crisis, I think there are some important differences according to the article:
In 2008 the fundamental problem were defaults - people just weren't meeting their mortgage payments (and lots of financial engineering that spread the losses in ways nobody understood beforehand). This sounds like the problem is mainly related to rising interest rates, through a number of channels: 1) less demand for loans and thus less top-line revenue, 2) lower value of fixed-rate loans in wholesale markets (on which they seem to have relied), and potentially 3) higher refinancing costs if they didn't hedge out the interest rate risk in their books (fixed interest income, floating interest expenses). Banks generally hedge out these risks because regulation forces them to be very conservative in their risk management, but here it seems we're mostly talking about non-banks, so they may have fallen for the temptation of a little short-term profitability boost by saving on interest rate protection.
I'm not saying that defaults aren't a problem, especially in this extremely high-risk subprime business that we seem to be talking about here, but there is some hope to think that those might be less bad this time. We're seeing a lot of inflation, and if wages keep pace with prices (conceivable in a time of low unemployment) then the burden of debt service on fixed-rate mortgages would actually become smaller in proportion to the overall household budget. Of course, there are still a lot of ways things could go quite wrong re defaults (eg prices have been skyrocketing in a lot of areas, if those start to plunge anything is on the table, even strategic defaults). But it's interesting to note that lenders can also face problems unrelated to defaults.
I'm also curious how those actors (usually insurances) who took the floating end of interest rate swaps during the lows are doing now.
- JackFr 4y agoTo reiterate and sum up - during the crisis the price of mortgage backed assets was declining in a very low rate environment because of increased risk of default. In the current environment the price of mortgage backed assets are declining because of a high rate environment. Both are bad for non-bank lenders who are typically fairly leveraged and rely on short term lines of credit for that leverage. The big difference is that the underlying loans are still money-good, they’re just paying a low rate of interest.
- t_mann 4y agoagree, good summary. in very simplifying algebra, if you have a fixed mortgage rate r and a market interest rate i, then you'd expect the wholesale market price p of the loan to adjust such that i ~ r/p plus some markups for risk, cost, profit,... so if r is fixed and i is pushed up by the Fed, then thing that has to give is p (going down), even if the risk markup doesn't change
- salawat 4y agoIf everyone gets it wrong however, it devolves to: -rip
- thunky 4y agoStill money-good now, but if higher rates push down prices and owners go underwater and default in large numbers, maybe not so money-good later.
- bombcar 4y agoThe 2008 crisis was foretold by the failure of providers of "liar loans" before the contagion spread. However, I think this time is as you say, a bit different, but we'll see.
- deleted 4y ago[deleted]