4 ms·

It's an interesting hypothetical, but presumably there is data about how much mortgages are worth along all these axes, since they are traded fairly heavily. We

It's an interesting hypothetical, but presumably there is data about how much mortgages are worth along all these axes, since they are traded fairly heavily. We don't need to guess about it.

ChuckMcM 13y ago
The challenge here is that the mortgage has a different valuing scheme than the property. The mortgage is valued against the rate of return and the risk of default. The property is valued against comparable properties. The whole problem here is that you might have a $200K mortgage which is written to a very credit worthy borrower who is paying on time, against a house with a market value of $100K (probably not in the Bay Area but this is just an example). So the fair market value of a $200K mortgage, that matures in 2033 might be $100k (this is essentially a zero coupon bond at this point and we're assuming a 3.5% rate of return) could be "destroyed" (which is to say seized by eminent domain) and replaced with a $100K mortgage that matures in 2043 (assuming a 30 yr mortgage). That is worth something like $35,000 (again assuming an annual rate of 3.5%) which quite a bit less than $100K, So looking at it as an investor you've had $100K worth of "principal" stolen from your retirement account by the City of Richmond, and sold to someone else for basically 1/3 the price, because the underlying basis for this particular investment vehicle was someones home, which is now underwater value wise. The saddest part of the mortgage mess is that it is so freakishly complicated to figure out what or who owns a mortgage in the world of derivatives. If Richmond is successful (and I hope they are) the next story will be people who have this sudden drop in their 401k investment value with a note "Funds taken by City of Richmond" ) and those folks are going to go "WTF?" and the next round of scare stories will be "Richmond just yanked nearly a billion dollars out of people 401k funds and gave them to a Hedge fund, could you be next?" And nobody will be calling for the real reform which is some level of regulation on what you can and cannot do with a home mortgage security.

It's an interesting hypothetical, but presumably there is data about how much mortgages are worth along all these axes, since they are traded fairly heavily. We don't need to guess about it.

ChuckMcM 13y ago

The challenge here is that the mortgage has a different valuing scheme than the property. The mortgage is valued against the rate of return and the risk of default. The property is valued against comparable properties. The whole problem here is that you might have a $200K mortgage which is written to a very credit worthy borrower who is paying on time, against a house with a market value of $100K (probably not in the Bay Area but this is just an example). So the fair market value of a $200K mortgage, that matures in 2033 might be $100k (this is essentially a zero coupon bond at this point and we're assuming a 3.5% rate of return) could be "destroyed" (which is to say seized by eminent domain) and replaced with a $100K mortgage that matures in 2043 (assuming a 30 yr mortgage). That is worth something like $35,000 (again assuming an annual rate of 3.5%) which quite a bit less than $100K, So looking at it as an investor you've had $100K worth of "principal" stolen from your retirement account by the City of Richmond, and sold to someone else for basically 1/3 the price, because the underlying basis for this particular investment vehicle was someones home, which is now underwater value wise. The saddest part of the mortgage mess is that it is so freakishly complicated to figure out what or who owns a mortgage in the world of derivatives. If Richmond is successful (and I hope they are) the next story will be people who have this sudden drop in their 401k investment value with a note "Funds taken by City of Richmond" ) and those folks are going to go "WTF?" and the next round of scare stories will be "Richmond just yanked nearly a billion dollars out of people 401k funds and gave them to a Hedge fund, could you be next?" And nobody will be calling for the real reform which is some level of regulation on what you can and cannot do with a home mortgage security.