13 ms·

Anxiety Strikes $8T Mortgage-Debt Market After SVB Collapse

89 points by makaimc 4y ago

makaimc 4y ago
https://archive.is/zm2i8 https://archive.is/zm2i8
debacle 4y ago
Is it really anxiety? Seems more like pulling a bandaid off. These mortgages pay out below the fed rate and there are way too many of them.
bequanna 4y ago
Cue the "this time is different" comments around housing supply and how high housing prices and low unemployment are here to stay. This is typically pure cognitive dissonance from people with a ton of equity in their homes. Housing is at record low levels of affordability.[0] The last time we saw something like this wasn't too long ago. And we can recall that it ended with affordability eventually reverting back to the mean after some nasty price action. Even if we don't yet know the trigger, it is very likely that housing prices will fall and defaults will rise. [0] https://nationalmortgageprofessional.com/news/goldman-sachs-housing-affordability-biggest-challenge-market https://nationalmortgageprofessional.com/news/goldman-sachs-...
- mastax 4y ago
  That index measures the affordability for buyers. If the houses are very affordable for their current owners (due to low rates locked in), what's the mechanism for them to default? Mass unemployment, I suppose. But that doesn't seem causally linked to the affordability index.
  - bequanna 4y ago
    Falling home prices and default rates are absolutely correlated. Again, just because we don't yet know the trigger which will cause this doesn't really matter. Home affordability is mean-reverting and the only way for it to revert is waaay higher incomes or lower home prices. I'll bet on lower home prices.
    - ericmay 4y ago
      > Home affordability is mean-reverting and the only way for it to revert is waaay higher incomes or lower home prices. I'll bet on lower home prices. Yes and no. It is or can be mean-reverting in the short term but not in the long-term else we have a deflationary economy which would be a disaster and we'd do anything to prevent it. > Again, just because we don't yet know the trigger which will cause this doesn't really matter. I think you're starting from a conclusion and working your way backward. It's no different than "the market will crash again at some point we just don't know why". You need to identify the trigger and then draw the conclusion. Not the other way around. BTW I see arguments for and against the general claim about mortgage defaults and it blowing up again. For - housing prices are way to high, banks bought mortgage-backed securities with rates that are too low, layoffs mean defaults, etc. Against - ongoing supply chain issues, housing supply is severely constrained everywhere in the country, low interest loans from those who keep their homes prevent them from moving, etc. but this is all surface level. Need specifics to draw meaningful conclusions.
      - bequanna 4y ago
        > Yes and no. It is or can be mean-reverting in the short term but not in the long-term else we have a deflationary economy which would be a disaster and we'd do anything to prevent it. This doesn't make sense. If affordability is always trending lower it means that housing is always getting more expensive in real terms. We know this isn't true. > I think you're starting from a conclusion and working your way backward. It's no different than "the market will crash again at some point we just don't know why". You need to identify the trigger and then draw the conclusion. Not the other way around. Interestingly, we can do that with many mean-reverting processes. Many, many people called the housing crisis on 2008 based solely on extreme valuations. Same with the market correction of the past year. Same with crypto correction. You can count on extreme valuations eventually mean-reverting.
        ameister14 4y ago
        [edit]I think they are saying that housing prices may revert to a shorter term mean and not say a 50-100 year mean because if it did the latter it would mean that there was serious deflation in the economy. Anyone that called the housing crisis in 2008 SOLELY on extreme valuations got very, very lucky. Housing prices are not mean-reverting in and of themselves. None of this happens in a vacuum.
  - pcthrowaway 4y ago
    Hmm.. don't people tend to borrow against their houses? If housing prices fall 10-20%, people with poor risk management might get effectively margin called, forcing them to liquidate, which becomes a contagion event.
    - aobdev 4y ago
      Mortgages are typically issued as non-recourse loans. This may not be true for HELOCs or other risky equity loans, but usually your lender can’t seize your home unless you haven’t been paying monthly.
      - djbusby 4y ago
        Foreclosure takes many months.
      - _huayra_ 4y ago
        I'm pretty sure HELOCs can be called any, iirc, but I'm not sure if fail to pay the call means they put a lien on your house or force you into foreclosure. When people say "you should buy real estate as an investment because you can't live in your brokerage account" and then do crazy stuff with their equity that they wouldn't even dream of when investing (e.g. Boglehead investors who HELOC for some net negative remodel) it really blows my mind...
        cudgy 4y ago
        HELOCS cannot be called, but they can be frozen, preventing further borrowing, or have their borrowing limits reduced.
    - linuxftw 4y ago
      You're on the right track. There won't be a margin call, but deflating/stagnant values and high interest rates prevent these lines of credit from being established. This is what causes the overall economic slowdown in the US. People use these HELOCs for all sorts of spending they can't afford otherwise.
  - cudgy 4y ago
    > If the houses are very affordable for their current owners (due to low rates locked in), what's the mechanism for them to default? Here’s one scenario … 1. Forced to move or choose to move, but keep house and rent it out 2. Housing prices drop along with rents that do not cover mortgage 3. Owner tires of losing money, but cannot sell house because underwater on low interest rate mortgage 4. Default
- dboreham 4y ago
  You'd need to somehow get people in the US to understand that a 30-year fixed rate mortgage (where the interest rate is anywhere close to current fed rate) is not a real thing. It only exists because USG distorts the market such that it can exist.
  - bequanna 4y ago
    As the Fed has stopped purchasing MBS and mortgage rates jumped to 7-8%, people are in denial and prices have been stubbornly high. Everyone I speak with seems to think this is "temporary", however, the current rates are much closer to reality and may be here for longer.
    - nradov 4y ago
      Mortgage rates are still under 7%. https://www.fund.com/top/mortgage-purchase/rates/mob/ https://www.fund.com/top/mortgage-purchase/rates/mob/
    - mschuster91 4y ago
      > Everyone I speak with seems to think this is "temporary", however, the current rates are much closer to reality and may be here for longer. IMO, it depends on how the war in Ukraine proceeds and if there will be signals of relaxing from China... in the end, interest rates represent systemic as well as individual risk and uncertainty, and the Russian invasion as well as the threat of a Chinese invasion into Taiwan (and a subsequent China-US or worldwide war) are the largest geopolitical risk factor by far.
  - nradov 4y ago
    30-year fixed rate mortgages would still exist without federal government support, just like 30-year fixed rate corporate bonds. But interest rates would be higher, and there might be stricter limits on LTV ratio or PMI.
    - pjc50 4y ago
      I don't think you can get a 30-year fixed mortgage in the UK. Or many other European countries.
- ameister14 4y ago
  Yeah, this time actually is different. The problem last time was the housing prices were driven by high-risk individuals getting large loans and then the crash was due to them defaulting on said loans. There was a system of incentives for Mortgage Backed Securities where the swap was based on the value of the properties in question as well as the potential interest rate, so the prices continued to go up. That's not happening right now.
  - blurbleblurble 4y ago
    "High risk individuals"? The "risk level of the individual" is totally wrapped up in how well the economy is able to provide people with adequate amounts of income to pay off debt, and that's not something any individual can determine. If there are systematic shifts that make it much more difficult for individuals to keep paying their debt, those individuals will become "high risk individuals".
    - ameister14 4y ago
      Sure, if the entire economy collapses people will start to default on their loans. What happened in 2005-2008, though, was people defaulting on their loans caused the economy to collapse. So while a low-risk loan can become higher risk depending on circumstances, classifying an existing high-risk loan as low-risk to improve your bottom line is never a good idea.
  - bequanna 4y ago
    Why does the cause need to be the same? Every stock market bubble has somewhat different causes but always ends the same.
    - ameister14 4y ago
      For a few reasons. First, you can't predict when or how things will happen if you don't know why they are happening or what is actually going on. Second, you can't consistently solve problems you don't understand. Third, this might not actually be a bubble. You seem to be saying 'of course it is a bubble, high prices == bubble,' but that's just not true.
admissionsguy 4y ago
Here is my uninformed, emotionally loaded take: so the mortgage industry not only makes houses unaffordable to so many people, but also is about to bring down the financial system with it, again?
- easytiger 4y ago
  How does the mortgage industry "makes houses unaffordable to so many people". It literally does the opposite.
  - throwaway1777 4y ago
    Houses would be a LOT cheaper if people couldn’t take on mortgages, especially not 30 year ones.
    - slavboj 4y ago
      And yet you would discover that most people couldn't assemble the necessary funds at once, certainly not near the beginning of their careers.
      - admissionsguy 4y ago
        Nor can they save for the downpayments, which are not far from where the prices used to be before the explosion that I attribute to cheap loans.
        bagacrap 4y ago
        If no one can afford even a down payment it's because supply is too low. It's not like there are tons of empty houses that mortgages are preventing buyers from acquiring. Also first time home buyers qualify for very low down payments, like 5%, fwiw.
        CuriouslyC 4y ago
mark_l_watson 4y ago
This worries me, but I also feel that I don’t have the personal knowledge to really understand how big of a threat this is. I feel more confident in my belief that Wall Street (as opposed to good banks, like local credit unions who stimulate local economies) are corrupt, and the individuals involved care 100% about their own power and status, and close to 0% about the working public. I expect that Wall Street banks would love to discredit the safety of local banks, but for my money I choose to do business with a few local credit unions whose board of directors are local and relatively transparent. The other elephant in the room is the astronomical amount of money in derivatives, and their lack of transparency.
- caseysoftware 4y ago
  > I expect that Wall Street banks would love to discredit the safety of local banks, but for my money I choose to do business with a few local credit unions whose board of directors are local and relatively transparent. They don't have to discredit them, the Feds are doing that. Local banks, credit unions, etc are NOT on the "too big to fail" (or "systemic risk") list so therefore they can fail and will be allowed to fail. It's also interesting that of the Big Four that are "too big to fail" three of them offer savings rates of under 0.25% it's almost as if they don't have to do anything to appeal to customers.
  - rajin444 4y ago
    Thank goodness they’re forced to be a little less reckless with our money so they can still make disproportionate profits off our savings. I am more than happy to help. What kind of government allows their citizens to bear the brunt of the risk for pitiful gains?
    - FireBeyond 4y ago
      When a bank complains about the onerous, expensive or excessive costs associated with risk management and compliance, what they're really saying is: "If it wasn't for that pesky government, we'd more than happily take more risks with -your- money!"
postalrat 4y ago
Whats going on? HN told me that if depositors were bailed out then nothing bad would happen.
bradleyjg 4y ago
The yield premium, or spread, over U.S. Treasury yields that investors demand to own an index of agency MBS bonds jumped as much as 27%, or 0.20 percentage point, after the run began on SVB, according to data from FactSet. This is a nothingburger of a story.
zenmacro 4y ago
> Now that the Federal Deposit Insurance Corp. has taken over SVB, investors expect the bonds to be sold off in coming months, adding supply to the weakened market and pushing prices lower. Do the rules say that FDIC has to sell these right away? I imagine they have discretion on timing the sales so that it doesn't dislocate the market. The FDIC is all about stability, after all...
wunderland 4y ago
What’s quickly unraveling shows how little has changed, primarily from a regulatory standpoint. Credit Suisse was deemed an internationally structural bank, one which could threaten global markets. The regulations to avoid further moral hazard called banks of this scale to easily separate their investment business from their retail bank. The theory was a “too big to fail” bank would be broken into the toxic casino side (which would be allowed to go bankrupt) and a healthy deposits business. Did this happen? Of course not! Banks have taken the past 10 years and found even more novel ways to gamble with money. And a decade of zero or near-zero interest rates led to a bubble in even dumber assets, once deemed safer than cash. Now we will live through yet another massive global wealth transfer upward, giving even more power to the banks who cannot lose.
Ancalagon 4y ago
just cancel the debt ;)

89 points by makaimc 4y ago

https://archive.is/zm2i8 https://archive.is/zm2i8

Is it really anxiety? Seems more like pulling a bandaid off. These mortgages pay out below the fed rate and there are way too many of them.

bequanna 4y ago

Cue the "this time is different" comments around housing supply and how high housing prices and low unemployment are here to stay. This is typically pure cognitive dissonance from people with a ton of equity in their homes. Housing is at record low levels of affordability.[0] The last time we saw something like this wasn't too long ago. And we can recall that it ended with affordability eventually reverting back to the mean after some nasty price action. Even if we don't yet know the trigger, it is very likely that housing prices will fall and defaults will rise. [0] https://nationalmortgageprofessional.com/news/goldman-sachs-housing-affordability-biggest-challenge-market https://nationalmortgageprofessional.com/news/goldman-sachs-...

mastax 4y ago
That index measures the affordability for buyers. If the houses are very affordable for their current owners (due to low rates locked in), what's the mechanism for them to default? Mass unemployment, I suppose. But that doesn't seem causally linked to the affordability index.
- bequanna 4y ago
  Falling home prices and default rates are absolutely correlated. Again, just because we don't yet know the trigger which will cause this doesn't really matter. Home affordability is mean-reverting and the only way for it to revert is waaay higher incomes or lower home prices. I'll bet on lower home prices.
  - ericmay 4y ago
    > Home affordability is mean-reverting and the only way for it to revert is waaay higher incomes or lower home prices. I'll bet on lower home prices. Yes and no. It is or can be mean-reverting in the short term but not in the long-term else we have a deflationary economy which would be a disaster and we'd do anything to prevent it. > Again, just because we don't yet know the trigger which will cause this doesn't really matter. I think you're starting from a conclusion and working your way backward. It's no different than "the market will crash again at some point we just don't know why". You need to identify the trigger and then draw the conclusion. Not the other way around. BTW I see arguments for and against the general claim about mortgage defaults and it blowing up again. For - housing prices are way to high, banks bought mortgage-backed securities with rates that are too low, layoffs mean defaults, etc. Against - ongoing supply chain issues, housing supply is severely constrained everywhere in the country, low interest loans from those who keep their homes prevent them from moving, etc. but this is all surface level. Need specifics to draw meaningful conclusions.
    - bequanna 4y ago
      > Yes and no. It is or can be mean-reverting in the short term but not in the long-term else we have a deflationary economy which would be a disaster and we'd do anything to prevent it. This doesn't make sense. If affordability is always trending lower it means that housing is always getting more expensive in real terms. We know this isn't true. > I think you're starting from a conclusion and working your way backward. It's no different than "the market will crash again at some point we just don't know why". You need to identify the trigger and then draw the conclusion. Not the other way around. Interestingly, we can do that with many mean-reverting processes. Many, many people called the housing crisis on 2008 based solely on extreme valuations. Same with the market correction of the past year. Same with crypto correction. You can count on extreme valuations eventually mean-reverting.
      - ameister14 4y ago
        [edit]I think they are saying that housing prices may revert to a shorter term mean and not say a 50-100 year mean because if it did the latter it would mean that there was serious deflation in the economy. Anyone that called the housing crisis in 2008 SOLELY on extreme valuations got very, very lucky. Housing prices are not mean-reverting in and of themselves. None of this happens in a vacuum.
- pcthrowaway 4y ago
  Hmm.. don't people tend to borrow against their houses? If housing prices fall 10-20%, people with poor risk management might get effectively margin called, forcing them to liquidate, which becomes a contagion event.
  - aobdev 4y ago
    Mortgages are typically issued as non-recourse loans. This may not be true for HELOCs or other risky equity loans, but usually your lender can’t seize your home unless you haven’t been paying monthly.
    - djbusby 4y ago
      Foreclosure takes many months.
    - _huayra_ 4y ago
      I'm pretty sure HELOCs can be called any, iirc, but I'm not sure if fail to pay the call means they put a lien on your house or force you into foreclosure. When people say "you should buy real estate as an investment because you can't live in your brokerage account" and then do crazy stuff with their equity that they wouldn't even dream of when investing (e.g. Boglehead investors who HELOC for some net negative remodel) it really blows my mind...
      - cudgy 4y ago
        HELOCS cannot be called, but they can be frozen, preventing further borrowing, or have their borrowing limits reduced.
  - linuxftw 4y ago
    You're on the right track. There won't be a margin call, but deflating/stagnant values and high interest rates prevent these lines of credit from being established. This is what causes the overall economic slowdown in the US. People use these HELOCs for all sorts of spending they can't afford otherwise.
- cudgy 4y ago
  > If the houses are very affordable for their current owners (due to low rates locked in), what's the mechanism for them to default? Here’s one scenario … 1. Forced to move or choose to move, but keep house and rent it out 2. Housing prices drop along with rents that do not cover mortgage 3. Owner tires of losing money, but cannot sell house because underwater on low interest rate mortgage 4. Default
dboreham 4y ago
You'd need to somehow get people in the US to understand that a 30-year fixed rate mortgage (where the interest rate is anywhere close to current fed rate) is not a real thing. It only exists because USG distorts the market such that it can exist.
- bequanna 4y ago
  As the Fed has stopped purchasing MBS and mortgage rates jumped to 7-8%, people are in denial and prices have been stubbornly high. Everyone I speak with seems to think this is "temporary", however, the current rates are much closer to reality and may be here for longer.
  - nradov 4y ago
    Mortgage rates are still under 7%. https://www.fund.com/top/mortgage-purchase/rates/mob/ https://www.fund.com/top/mortgage-purchase/rates/mob/
  - mschuster91 4y ago
    > Everyone I speak with seems to think this is "temporary", however, the current rates are much closer to reality and may be here for longer. IMO, it depends on how the war in Ukraine proceeds and if there will be signals of relaxing from China... in the end, interest rates represent systemic as well as individual risk and uncertainty, and the Russian invasion as well as the threat of a Chinese invasion into Taiwan (and a subsequent China-US or worldwide war) are the largest geopolitical risk factor by far.
- nradov 4y ago
  30-year fixed rate mortgages would still exist without federal government support, just like 30-year fixed rate corporate bonds. But interest rates would be higher, and there might be stricter limits on LTV ratio or PMI.
  - pjc50 4y ago
    I don't think you can get a 30-year fixed mortgage in the UK. Or many other European countries.
ameister14 4y ago
Yeah, this time actually is different. The problem last time was the housing prices were driven by high-risk individuals getting large loans and then the crash was due to them defaulting on said loans. There was a system of incentives for Mortgage Backed Securities where the swap was based on the value of the properties in question as well as the potential interest rate, so the prices continued to go up. That's not happening right now.
- blurbleblurble 4y ago
  "High risk individuals"? The "risk level of the individual" is totally wrapped up in how well the economy is able to provide people with adequate amounts of income to pay off debt, and that's not something any individual can determine. If there are systematic shifts that make it much more difficult for individuals to keep paying their debt, those individuals will become "high risk individuals".
  - ameister14 4y ago
    Sure, if the entire economy collapses people will start to default on their loans. What happened in 2005-2008, though, was people defaulting on their loans caused the economy to collapse. So while a low-risk loan can become higher risk depending on circumstances, classifying an existing high-risk loan as low-risk to improve your bottom line is never a good idea.
- bequanna 4y ago
  Why does the cause need to be the same? Every stock market bubble has somewhat different causes but always ends the same.
  - ameister14 4y ago
    For a few reasons. First, you can't predict when or how things will happen if you don't know why they are happening or what is actually going on. Second, you can't consistently solve problems you don't understand. Third, this might not actually be a bubble. You seem to be saying 'of course it is a bubble, high prices == bubble,' but that's just not true.

admissionsguy 4y ago

Here is my uninformed, emotionally loaded take: so the mortgage industry not only makes houses unaffordable to so many people, but also is about to bring down the financial system with it, again?

easytiger 4y ago
How does the mortgage industry "makes houses unaffordable to so many people". It literally does the opposite.
- throwaway1777 4y ago
  Houses would be a LOT cheaper if people couldn’t take on mortgages, especially not 30 year ones.
  - slavboj 4y ago
    And yet you would discover that most people couldn't assemble the necessary funds at once, certainly not near the beginning of their careers.
    - admissionsguy 4y ago
      Nor can they save for the downpayments, which are not far from where the prices used to be before the explosion that I attribute to cheap loans.
      - bagacrap 4y ago
        If no one can afford even a down payment it's because supply is too low. It's not like there are tons of empty houses that mortgages are preventing buyers from acquiring. Also first time home buyers qualify for very low down payments, like 5%, fwiw.
        CuriouslyC 4y ago

mark_l_watson 4y ago

This worries me, but I also feel that I don’t have the personal knowledge to really understand how big of a threat this is. I feel more confident in my belief that Wall Street (as opposed to good banks, like local credit unions who stimulate local economies) are corrupt, and the individuals involved care 100% about their own power and status, and close to 0% about the working public. I expect that Wall Street banks would love to discredit the safety of local banks, but for my money I choose to do business with a few local credit unions whose board of directors are local and relatively transparent. The other elephant in the room is the astronomical amount of money in derivatives, and their lack of transparency.

caseysoftware 4y ago
> I expect that Wall Street banks would love to discredit the safety of local banks, but for my money I choose to do business with a few local credit unions whose board of directors are local and relatively transparent. They don't have to discredit them, the Feds are doing that. Local banks, credit unions, etc are NOT on the "too big to fail" (or "systemic risk") list so therefore they can fail and will be allowed to fail. It's also interesting that of the Big Four that are "too big to fail" three of them offer savings rates of under 0.25% it's almost as if they don't have to do anything to appeal to customers.
- rajin444 4y ago
  Thank goodness they’re forced to be a little less reckless with our money so they can still make disproportionate profits off our savings. I am more than happy to help. What kind of government allows their citizens to bear the brunt of the risk for pitiful gains?
  - FireBeyond 4y ago
    When a bank complains about the onerous, expensive or excessive costs associated with risk management and compliance, what they're really saying is: "If it wasn't for that pesky government, we'd more than happily take more risks with -your- money!"

postalrat 4y ago

Whats going on? HN told me that if depositors were bailed out then nothing bad would happen.

bradleyjg 4y ago

The yield premium, or spread, over U.S. Treasury yields that investors demand to own an index of agency MBS bonds jumped as much as 27%, or 0.20 percentage point, after the run began on SVB, according to data from FactSet. This is a nothingburger of a story.

zenmacro 4y ago

> Now that the Federal Deposit Insurance Corp. has taken over SVB, investors expect the bonds to be sold off in coming months, adding supply to the weakened market and pushing prices lower. Do the rules say that FDIC has to sell these right away? I imagine they have discretion on timing the sales so that it doesn't dislocate the market. The FDIC is all about stability, after all...

wunderland 4y ago

What’s quickly unraveling shows how little has changed, primarily from a regulatory standpoint. Credit Suisse was deemed an internationally structural bank, one which could threaten global markets. The regulations to avoid further moral hazard called banks of this scale to easily separate their investment business from their retail bank. The theory was a “too big to fail” bank would be broken into the toxic casino side (which would be allowed to go bankrupt) and a healthy deposits business. Did this happen? Of course not! Banks have taken the past 10 years and found even more novel ways to gamble with money. And a decade of zero or near-zero interest rates led to a bubble in even dumber assets, once deemed safer than cash. Now we will live through yet another massive global wealth transfer upward, giving even more power to the banks who cannot lose.

Ancalagon 4y ago

just cancel the debt ;)