The mortgage finance merry-go-round

From the high and mighty hedge fund investors to struggling homeowners, the pain continues. No one's getting off this whirling dervish ride, yet.

By Andrew Leonard
June 20, 2007 1:18AM (UTC)
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Thank goodness that since 2005 it has been the New York Times' policy to inform readers why the paper grants anonymity to sources. Without that requirement, we wouldn't have this gem at the end of a story reporting growing nervousness on Wall Street about the declining health of mortgage securities.

"We don't really know the ripple effects," said one industry official who spoke on the condition of anonymity because of the sensitivity and gravity of the situation. "It is causing a revaluation of the securities, some of which may lead to additional liquidations. That's possible, but it's not set in stone."

I don't know which is scarier: that somebody didn't have the guts to attach his or her name to statements as innocuous as "we don't really know the ripple effects" and "that's possible, but it's not set in stone," or that the Times' reporters thought that the "sensitivity and gravity" of weakness in the mortgage bond market merited granting anonymity. National security, this isn't.


Whatever. After a few months in which worries about the housing sector's impact on the larger economy slipped from the headlines, concern seems to be bubbling up again, on two separate, but intimately related, fronts.

The first involves the individual American consumer's spending habits. Once again, the econoblogosphere is wondering: Have we finally reached the point where the housing slump is taking a real bite out of consumption? A report released today by UCLA's Anderson Forecast suggests that, judging by April's disappointing retail sales figures, yes, the home equity ATM is running out of cash. (Thanks to Calculated Risk for the link.)

But May retail sales were reported to be much healthier. What gives? It's possible, according to analysts at the Northern Trust Corp., to crunch the numbers over the last three months and determine that the trend line for consumer spending is heading down, but it's still hard to make a totally convincing case that it is about to go in the tank.


On the other end of the spectrum from the Joe Sixpacks who are struggling to make their adjustable rate mortgage payments, and getting foreclosed upon in record numbers, are the big institutional investors who have been living high on the hog for years merrily speculating in complex derivative financial instruments whose real value is tied, ultimately, to whether or not those mortgage payments are being made. The woes experienced by a Bear Stearns hedge fund caught up to its neck in mortgage derivative quicksand has been a hot topic in the financial press for the past week. The ABX index, which offers a way to measure investor appetite for mortgage bond derivatives, sunk to its lowest level ever on Tuesday. On Friday, the credit rating service Moody's downgraded the credit-worthiness of hundreds of mortgage securities. That, in turn, may force institutional investors who are required to confine their investments to high-rated bonds to unload their holdings, which will exert more downward pressure on the value of the bonds. (Thanks, as always, to the Housing Bubble Blog for a plenitude of links.)

Meanwhile, the U.S. stock market continues to shrug off any signs of pain. But as Jeffrey Gundlach, an investment company executive who did allow himself to be named in the Times, observed, "Mortgage finance occurs in slow motion compared to other parts of the financial markets ... This isn't an Enron corporate bond that goes into default overnight. This is a process that takes 30, 60, and 90 days of delinquencies before it goes into foreclosure."

So here's where we stand. Mortgage rates are rising, the inventory of homes on the market is still at a near record high, home prices are declining in many markets, and foreclosures are continuing apace. Meanwhile, the damage that has already occurred is only now claiming its first high-profile victims on Wall Street. And at last check, few people appear willing, as they were last fall and early this spring, to declare that the "bottom" has arrived.


Come to think of it, that does sound like a "situation" that could be considered grave and sensitive.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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