Anxiety Strikes $8T Mortgage-Debt Market After SVB Collapse
wsj.com
wsj.com
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.
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.
What kind of government allows their citizens to bear the brunt of the risk for pitiful gains?
"If it wasn't for that pesky government, we'd more than happily take more risks with -your- money!"
So sure, banks want to take more risks with your money. But if you start to understand the web of banking regulations, you'll see that there are multiple different groups with oversight, each with different goals and different regulatory frameworks. It's extremely difficult to maintain compliance and the complexity is a problem for a number of reasons, including the fact that a lot of the regulations are legacies of a time before interstate banking.
The Fed == the Wall Street banks. The Wall Street banks are the overwhelming shareholders of the Fed.
Sorry but isn't this only a problem for those with more than $250k, and that frankly is a lot for an individual. And even then you could just create another account at another local bank and you're golden. If you have a million cash, then handling four bank accounts is really not a bad problem.
(1) SVB taught you that the feds will let a bank run happen
(2) They won't save the poor saps that were too slow moving their money
(3) The systemically important banks are too big to fail. A bank that can't pay depositors back is failed. Ergo, the SIB are too big to lose customer deposits.
So you flee your regional bank because the single most important thing about a bank is that they don't lose your money.
This fear is unfounded. Depositors were bailed out. (That said, yes, utilising the bank’s sweep feature would be wise. As would having a second bank account.)
You can't prevent a bank run if people are going around whatsapp groups of major depositors telling each other to get their money out.
> (2) They won't save the poor saps that were too slow moving their money
They absolutely did, even when the rules didn't say they had to?
Sure you can. You close the bank when it's insolvent and people are saying to get your money out.
>They absolutely did, even when the rules didn't say they had to?
Yes and my post was to illustrate why. Perhaps that was not as clear as it could be.
How does this materially differ from what happened? Is there a federal power to temporarily close banks? Doesn't the run immediately continue when reopened?
Regulators have broad power to close banks. They could have done so when SVB failed to raise equity or really before that. Run stops because deposits are transferred to a healthy bank.
Perhaps, but does this mean you just leave your cash exposed to almost a complete loss? Surely there are services/software that could manage this for you? Seems like a lazy and incompetent accounting department.
Just ask ChatGPT how to do it <sarcasm>
And lots of local businesses. 100 employees at 48k a year gets you to 200k a month in payroll. Never mind the money it takes to run that business.
Even if you are under the 250k mark, if your bank closes on a pay day your staff is the group that suffers.
The specific problem for SVB was that many VCs got their companies to agree not to do this, specifically to keep all the money in SVB.
What was in it for the VCs???
I work for a six-person startup; our CEO landed on Brex after SVB, and one of the reasons he gave was that it does exactly this (up to 9 banks). See https://www.brex.com/product/business-account
This is literally how it's supposed to work: anybody more risky has to offer an incentive to the punters.
But bank deposits are different (as Matt Levine put it: you don't want to evaluate your bank's solvency any more than you want to inspect the factory where your can of beans was packed) -- most people don't even look at the rate their bank is paying when they open an account.
The "bubbliness" doesn't match 2008. For one thing, there hasn't been a build boom to try to cash in. My personal opinion is that we've absorbed another systemic shock - the war and sanctioning of the Russian economy, and especially the European gas price shock. That's still propagating through but the effect is diminishing rather than increasing.
(my slightly cynical take is that anything the news tells you to be scared of is probably not a threat, and that the real threats are surrounded by protective clouds of optimistic hype)
> the individuals involved care 100% about their own power and status, and close to 0% about the working public.
The American Way, surely?
It's not necessarily the case that local banks are safer. The US "savings and loan crisis", Spanish "cajas" etc.
> The other elephant in the room is the astronomical amount of money in derivatives, and their lack of transparency.
It does feel like this is where the systemic risk may have gone.
> It does feel like this is where the systemic risk may have gone.
It's... kind of supposed to?
Take SVB, for instance. What they should have done is use derivatives to hedge their exposure to interest rates rising. They should have transferred the risk to other parties that either had the opposite exposure, or else were willing to take the risk for the right price.
Now, as we saw in 2008, all kinds of eldritch horrors can hide in derivatives, and the lack of transparency makes it very hard to see problems coming. And even in the case of SVB, that would still have left them with the counterparty risk. But the derivative market is where the risk is supposed to go, because it's the place that's supposed to be in the business of handling it.
We'd prefer any derivatives crisis to blow up only some unloved hedge funds, fly by night banks, and dumb sovereign wealth funds, but it turns out they keep selling on risky assets to unsophisticated investors. Like interest rate swaps.
https://www.usnews.com/opinion/blogs/economic-intelligence/2...
https://en.wikipedia.org/wiki/Local_authorities_swaps_litiga...
It literally does the opposite.
Also first time home buyers qualify for very low down payments, like 5%, fwiw.
No, they wouldn't. as evidenced anywhere this is tried
In two extremes: Imagine a market with 20% interest rates. You could just save money instead of holding the loan for 5 years, and then pay cash. Fewer people would have mortgages.
Imagine 0.1% fixed, interest-only loans. Financing a house with that would cost about 1/200th as much as in the 20% environment, so prices would increase by something like 200x.
We are coming out of ~2% rates. That means houses should cost a bit under 10x more than they would at 20%. If you put 20% down, you could probably have purchased outright in the other environment.
(This ignores the possibility of new construction, since I live in California, and that’s more realistic than saying people will be allowed to build housing to take advantage of low mortgage rate arbitrage).
Edit: Think of the 0.1% case from a home builders perspective. They build a house for $500K (say), so a rational homebuilder wouldn’t pay more than about that to buy a house for themselves (in the absence of market distortions).
However, the buyer could take their $500K, and put it into investments that yield a few percent a year. Say they are conservative, and assume a minimum 1% annual yield. Now, they can pay the builder $4,999,999 for the house, giving the builder ~$4.5M of disposable income. The builder then spends the money, driving up prices for everyone else. (Of course, they would be wise if they used some of the money to build 5 or 6 more houses, since that leads to exponential income growth for them over time.)
Because even when interest rates were high, people were not generally buying their homes in cash.
That's like saying instead of renting for years you could just save that rent money and buy a house after a few years.
And with low rates, no one was buying a house with just a 5 year mortgage either.
The only reason you are seeing a lot of cash buyers right now is that you have lots of people who have sold their homes at inflated prices after buying years ago at near nothing and now that prices are falling, they have the cash to buy. But that won't last and it will soon be back to only the small group of people with very big incomes or family money and investment firms that are buying in cash.
Owner financing is a very different instrument from a traditional mortgage. Most importantly, the terms are completely negotiable, meaning that buyers can obtain low interest owner financing even when general interest rates are high, especially when owners are desperate to sell. Owner finance instruments can also be obtained by less qualified borrowers, are not backed by government agencies, servicing costs are negligible, and many do not report to credit bureaus, which has significant implications to borrowers.
If anything, the 2008 financial crisis should have taught us that lending more money to people than they can responsibly bear is not a wise idea, neither for the lenders but also not for the borrowers.
Ex: In SF there were a lot of good big tech jobs paying $200k-$1m / yr. A vast majority of those wage increases accrued into the hands of landlords. Mortgages allow buyers to borrow against projected future earnings, allowing each buyer an affordable price compared to one who doesn't mortgage, but when everyone does it the benefits get nullified.
This is the desired outcome.
1. Many modern couples actually have less income available for savings and housing despite having two earners say compared to single earning couples in the 50’s and 60’s when gas station attendants could afford to buy a home for a wife and several kids 2. Extremely low Interest rates have caused a much higher impact on available funds to buy homes than increases in available funds for housing from wages 3. No kid couples require smaller, cheaper houses without regard to school districts, family friendly environments, etc.
The mortgage industry isn't really to blame for high prices.
A 400k house might instead be a 200k house, but you will never have 200k in cash compared to 20k for a down payment on a mortgage.
I manage a fund in Canada that does exactly that. We have a pool of investors, and lend out on mortgages only. Primarily in markets larger institutions won’t touch.
30-year fixed-rate mortgages for middle earners are a policy creation, not a natural market creature.
Centrally controlled interest rates are basically price controls. The govt controls the price of money. Even a 5 year old knows price controls don't work, but we can't expect that from the govt.
What rate would you feel comfortable loaning money to friends or colleagues at?
The question is more, how do you introduce money to the money supply (which you must do if for no other reason than physical wear/destruction of currency) without a central issuer who sets an interest rate on that issuance?
It's hard to imagine commodities being substantially cheaper if we didn't have 30-year mortgages.
Home builder margins aren't impressive.
The cost of a new home is pretty much the cost of the lot, plus the cost to build it, plus a 10-20% margin.
That margin isn't going down a lot, even if you don't have 30-year mortgages. All that's happening is that the size of US homes would be much, much smaller.
And you might have some pressure for smaller lot sizes in places like SoCal and NorCal and Seattle.
Constructing a house is rather expensive, here’s just a random link from google:
https://www.ramseysolutions.com/real-estate/how-much-does-it...
Another random link claims 30-50% of the cost is labor:
If you are unhappy with the general shape of residential lending in the US blame falls squarely on the federal government. Not just as regulators but as far far away the largest direct participant.
Lords of East Money by Christopher Leonard
This is a nothingburger of a story.
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-...
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.
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.
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.
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.
Doesn’t this hurt your case as well?
Every housing chart I’ve seen for metro areas shows a distinct boom/bust cycle in housing that is indicative of mean reversion to around 25-30% of payment to earnings ratio. Many metro areas in US are over 40% now.
Over what period? Have there been any fundamental changes in the financing or supply of housing? How about the people purchasing homes - are there any differences between cycles? It's also possible that income rises without housing prices falling at all. That hasn't happened since the 60's, but it's possible.
Also, I don't think there are distinct boom/bust cycles in housing generally, because the charts lack the necessary trough. Look at the House Price Index for New York, for example; it is not representative of a distinct boom/bust cycle at all; price retractions are a fraction of the previous growth and last for shorter periods over the last 47 years.
Further, I don't think it's indicative of mean reversion to around 25%-30% because the house price growth rate has outpaced the income growth rate by 2-3X for over 50 years.
Are you saying that this only applies to metro areas?
Could you share some examples of this data? Mine mostly comes from the St. Louis Fed: https://fred.stlouisfed.org/
https://www.longtermtrends.net/home-price-median-annual-inco...
This isn't really a chart showing a cycle, at least not a multi-year cycle. You have 40 years of between 4 and 5, then a 5 year bubble and a retrenchment that bottoms out at about 5 before rising again.
There's no consistent cycle, though. If, for example, every 20 years you had it cross 5 and go to 6 then go back to 4 for a few years before repeating, that would be a cycle.
Even small swings from 5 to 4 demonstrate a 25% swing in aggregate housing prices, which is still significant. The whipsawing recently since 2000 represent two swings of around 75% in aggregate housing prices relative to incomes.
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...
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
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.
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.
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".
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.
Every stock market bubble has somewhat different causes but always ends the same.
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.
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.
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...