The return of Sub-Prime, part 1

HAMISH_MCTAVISH

Graham_Devon wrote: »

Hamish once again ignoring the collosal amounts of money thrown into the system and extreme low interest rates, to suggest the loans are doing well.

American mortgages are almost all on long term fixed rates, even the ones that started out with the teasers.

Morgage_Confused

Im in Surrey. There is a huge supply and demand problem here. Housing is very expensive.

There is zero social housing left. I was in the council offices about a year ago and there was a big sign on the wall. This is no !!!!!!!!. Im paraphrasing a bit here but it said something along the lines of.

"If you are on the social housing waiting list you will not be housed"

This is a true story and I wish now I got a photograph of it because i find it a disgrace....but its a fact.

So to conclude...down here in Surrey...I can assure you its a supply and demand problem. Ive got a 3bed mid terrace and its now "worth" 300k.....Im considering selling up and becoming one of those cash buyers from the above posted graph.

shortchanged_2

HAMISH_MCTAVISH wrote: »

If house prices are nothing to do with supply and demand, then why does a 3 bed Victorian terrace in the North cost 60K, and a near identical 3 bed Victorian terrace in London cost 600K?

After all, credit is available everywhere equally.... the lending criteria in Preston is no different to the lending criteria in Chelsea.

Is the average earnings of these areas anything to do with it? Well that and the large swathe of overseas investors flooding the London market.

Generali

HAMISH_MCTAVISH wrote: »

There is nothing inherently wrong with most sub-prime lending, so long as it is clearly labelled as such and not mis-sold as AAA.

As you've been told many times Graham, it wasn't the default rates from sub prime lending that caused the financial crisis.

It was the mis-selling of sub prime as AAA that caused global panic and the shut down of the credit markets.

The actual performance of these mortgage borrowers, as it turns out, has been massively better than the doom-mongers and panic merchants predicted.

Hence why the price on the bonds are soaring.

The default rate on sub prime lending was at 15% on some books. It was that very high rate of default combined with falling US house prices that led to losses on the AAA part of CDOs.

There are 2 things here: the AAA tranche sub prime CDOs shouldn't have been given a AAA rating and the default rates on sub prime mortgages were well in excess of what was expected as part of the modelling that made up the CDOs. By definition, if the default rate was as expected there would be no loss on the CDOs!

The subsequent profit for hedge funds has come from buying up distressed CDOs and finding the recovery rate was higher than expected after things started going wrong. In part the profits will simply have come from interest rates being lower for longer than was predicted: lower interest rates => higher asset prices as the yield on the assets becomes more attractive so people will pay more for it.

The profit for hedgies has come almost entirely from a Benjamin Graham value approach. It worked in the 1930s and it still works today.

Linton

dryhat wrote: »

... Whatever

The fact remains that high house prices are not a result of supply and demand but the availability of credit.

No - supply and demand is the mechanism by which increased credit leads to house price increases. Any increase in the ability of buyers to pay higher prices, whether its increased credit, gifts from parents, higher wages or whatever, in the absence of increased supply, will lead to prices rising to use the extra finance available.

With restricted supply, no matter how much money you put into the system or take out much the same % of people are going to be unable to afford to buy a house and will complain that prices are too high.

HAMISH_MCTAVISH

Generali wrote: »

The default rate on sub prime lending was at 15% on some books.

Sure, but the subsequent discount on those books far exceeded the likely default rate, as the projections were worse still.

the default rates on sub prime mortgages were well in excess of what was expected as part of the modelling that made up the CDOs. By definition, if the default rate was as expected there would be no loss on the CDOs!

Totally agree.

However the actual default rate turned out to be better than the panic stricken projected default rates at the peak of the crisis, hence why the bonds were oversold, and have since recovered markedly.

Some of those books have appreciated by 50% in the last couple of years, as actual default rates become clear, and they turn out to be far better than expected during the crisis.

The subsequent profit for hedge funds has come from buying up distressed CDOs and finding the recovery rate was higher than expected after things started going wrong.

Indeed.

The profit for hedgies has come almost entirely from a Benjamin Graham value approach. It worked in the 1930s and it still works today.

The point I was making is that fear overcame reason during much of the crisis, and many assets were markedly undervalued as a result.

It's no coincidence that some of the more successful hedgies making a killing on these bonds which they knew to be undervalued, are the very bankers that created them to begin with.

the_flying_pig

HAMISH_MCTAVISH wrote: »

Just because you repeat such idiotic drivel certainly doesn't make it any less idiotic.

If that was the main reason for high prices, then average prices would be a lot more than 10% down nationally, seeing as how 70% of mortgage funding has been withdrawn from the market.:)

If house prices are nothing to do with supply and demand, then why does a 3 bed Victorian terrace in the North cost 60K, and a near identical 3 bed Victorian terrace in London cost 600K?

After all, credit is available everywhere equally.... the lending criteria in Preston is no different to the lending criteria in Chelsea.

yeah, i mean we've been through this about a million pillion zillion times but:

1 - like the price of more or less every good or service that has ever been or will ever be sold, house prices are determined by supply & demand;

2 - there are many determinants of demand for home ownership, including but not limited to total population, average wages, the supply & price of credit, various aspects of 'sentiment', the total amount of state money pumped into buying/renting houses, [...]

3 - your assertions on this thread are as ever just about the most highly biased and zzzz...

Generali

HAMISH_MCTAVISH wrote: »

However the actual default rate turned out to be better than the panic stricken projected default rates at the peak of the crisis, hence why the bonds were oversold, and have since recovered markedly.

Some of those books have appreciated by 50% in the last couple of years, as actual default rates become clear, and they turn out to be far better than expected during the crisis.

The point I was making is that fear overcame reason during much of the crisis, and many assets were markedly undervalued as a result.

It's no coincidence that some of the more successful hedgies making a killing on these bonds which they knew to be undervalued, are the very bankers that created them to begin with.

I agree absolutely.

To put it more simply, an asset was sold for 100, dropped to 20 and has risen to 50. There is still a loss to the original buyers, if they are still holding, but there has been money to be made from the volatility in the meantime.

Some of this stuff is sitting on peoples' books at pennies for each $100 of face value. Now that will partly simply reflect the fact that repayments of principal reduce the face value of the CDO and many of these products are 5-10 years old but also it shows, IMHO, that in many cases this stuff may be undervalued.

Generali

For anyone that is interested in trading or wants to take a more structured approach to investing:

http://www.amazon.com/Security-Analysis-Benjamin-Graham/dp/1932378073

(you can prolly find a pdf on the interweb somewhere).

Thrugelmir

AIG picked up the bulk of the tab and paid the ultimate price.

Bank of America settled for $12 billion today. Wonder how much RBS will end up paying?