"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Thursday, February 24, 2011

Godfather of the Mortgage Backed Security (MBS) Speaks...Potential for a Flood of Foreclosures

CNBC interviewed Lewis Ranieri yesterday.  Ranieri is a pioneer of the securitization of mortgaged backed securities.  I was surprised at his openness during the interview.  Here is a summary of his points, video of the interview follows:

  • The housing market is still fragile
  • Lack of credit is to blame...  credit is still tight
  • On what could loosen credit: A transition of the existing market..  government involvement.
  • The magnitude of the current overhang is 6.5 million, add shadow inventory, and it is closer to 11 million, which is 4 years of overhang.
  • Regarding foreclosures I quote from the interview:
"Where we are currently, with the current state of affordability, and the current state of credit, we're going to double foreclosures, and politically, that's just going to be unacceptable...  because it's real people... if we go from 1.2 to 2 and half million foreclosures?  The system will just come apart at the seams.  Putting that many people out of their houses, causing that kind of destruction...  because remember we have hundreds of thousands of vacant houses... and a vacant house is a virus on the neighborhood.... it spreads and takes whole neighborhoods with it.  I mean there have been studies of whole neighborhoods where foreclosures became greater and eventually it took whole middle class neighborhoods and turned them into wastelands."

He does believe there are solutions to this problem.  One is an investor finance program, where local investors buy a foreclosure, fix it up and resell it.

I agree with Ranieri's description of the current housing mess, but as to his solution, not so much.  Earlier in the interview he suggested that one possibility is to transition to a government market.  But isn't it already, in effect nationalized?  And didn't Fannie and Freddie, both government sponsored entities, share in the creation of this mess?

But more importantly, there are two other issues that affect housing.  One is the creation of entire neighborhoods of McMansions located far away from employment centers.  With the increasing cost of oil, this is a recipe for disaster.  How will people continue to commute and pay a mortgage as gasoline costs rise? The second issue is employment.  Unemployed people don't buy homes.  And many people that do have a job are scared of losing it.  This represents a huge psychological obstacle to the housing market.  I believe there are many people still sitting on the sidelines because of job insecurity.  After all, for most Americans, this is either a Recession or a Depression, depending on their circumstances.  Most policymakers don't seem to be making the connection here.  They view the housing situation as a separate issue.

And there is one more issue that we need to consider.  Is home ownership still worth it?  Is a house an investment or a shelter?  What type of future financial expectations should we have when owning a home?  What if the government, and there is talk about this, decides to get rid of the mortgage interest deduction?  There have been estimates that removing the homeowner interest deduction could make housing fall another 20-30%!

There are no easy answers.

Here is the interview:


boatman said...

many studies ive read indicate 6-7 year inventory of houses.

govmint housing intervention? it is happening n as you said it will make it worse.

it was our last BIG manufacturing sector.....can't ship a house from china.

not only driving to those mcmansions...how about heat/cool them.

i've blown some calls, but i did build(myself) my house in 95' at 1000 sq ft....r30 in ceiling n r19 in ext. walls.....very small wood stove can run u outta here if you let it breath(20's here 8 mornings this winter)....even here in north fl- never had elec bill over $60 n comfortable.

here we are at '37 on the DOW chart.....i'm buckled in n eyeing a 'hans' head restraint.

but we're smilin anyway,eh Mist?

Misthos said...

boatman - You're right, you can't ship a house from China. But you know what else you can do if you base your "manufacturing" on housing?

You can collateralize it, bundle it, securitize it, rate it "AAA", sell all that paper, and if you think that paper stinks, you can credit default swap it! (You can't do that with exporting plastic stuff, like China does!)

All that adds to GDP. What a awesome racket until it hits a wall.. oh wait, that already happened.

It's funny, but if 70% of our gdp is consumption, and much of that consumption was fueled by the housing-wall street money making complex... it's no wonder that the US Gov't needs trillion plus budget deficits to keep things going. The government needs huge deficits to fill the money vacuum left behind by the collapsed housing-wall street complex.

So what do we do? We print until we can't print no more... until our trade relationships tank, or we reach a negative return on printing, and then, I think, we go back (begrudglingly) to gold. The US can print away because it sits on a large reserve of gold. More paper is always the first solution. Gold is only a solution when all paper solutions are exhausted.

You're house's insulation is pretty impressive. Good thinking on your part.

So you see the Dow tanking soon?

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boatman said...

we all know its gonna happen...when is a problem, huh.

they discounted the lybia problem friday.

my sister is tight with the TechAnalysis Ph.D. teacher at UNF here, he's been looking for it since june.

i figured october-historic month for sentiment change....(in front of april)....humans can change w/fall n spring.

but the bernanke put lives on....til it doesn't i guess.

feel like i'm watching the house market in '05 only its the DOW.

i did alot of head shaking then too.

only thing i do know for sure is the next one is the big one....the DOW is the 1600's dutch tulip bulb bubble not gold/silv.

brazil n china peaked 3 mos. ago.....we usually 3 mos. behind them,huh....

i do believe they will throw baby out w/bathwater n gold n miners will drop initially w/dow.....unless people consider it money n i don't think we are there yet(other than us).

me,dog,skiff,sun,beer alotment, sandbar n no people tomorrow.

life is good.


Jim Slip said...

Protectionism (import substitution instead of export-led growth), very likely.

Return to gold-standard, I just don't see it.

Misthos said...


In all but the last 40 years of the history of global trade, even going back to Egyptian/Mycenean times, trade was conducted either through barter or precious metals as a medium of exchange. It was not conducted in exchange for future promises to pay.

When gold was dropped 40 years ago from international trade, the world's central banks and treasuries still held onto most of their gold.

Why is that?

Because gold is an insurance policy insuring against the possible collapse of the debt for trade system that we have today.

No one holds an insurance policy against something they rule out 100%.

And thus, the governments of the world hold gold, not because it is a shiny barbarous relic, and definitely not for a dividend or interest rate of return - gold offers neither. Gold pays nothing, it just sits there.

But they continue to hold gold because they don't rule out a collapse of the current debt-for goods monetary system.

So the debate, in my opinion, is not whether or not we return to a gold standard, but rather, the likelihood, or the possibility of the collapse of the current system.

In other words, gold as insurance involves a risk assessment. How likely is the possibility of the "event" happening? How serious is that risk?

So long as governments continue to be net buyers of gold, and so long as this crisis continues unresolved... that insurance policy's cost (gold) will continue to rise.

No government wants a return to the gold standard. And no government will be successfully convinced that gold is the way to go. Because honestly, it isn't if you're a government. Governments by their nature spend until they can no longer spend. Gold restricts this behavior.

So I see gold emerging once again, not by design, but more likely by default.

Misthos said...


I too am trying to be as self-reliant/sufficient as possible. I do consider myself fortunate to be on an island that rarely if ever freezes, and all types of food can be grown year round.

Even Marc Faber, who knows many extremely wealthy people, can attest that they too have their "Plan B" in place. They just don't openly talk about it. It's a taboo topic.

I guess if everyone understood how bad things could get, the system would meltdown overnight. Faith is what is keeping things going now.

As for the Dow - I can see it going down a lot. But unlike the 1930s, we have a Fed that will print.

The question is, will the Fed be stuck in a trap, and when? We've already seen the Fed's actions affect the emerging world. What does the Fed do when the market tanks, and price inflation skyrockets? The Fed may be able to influence the market, but it can't influence unintended consequences of such a policy.

Will the Fed continue to support the market if we have price inflation of 15-20% or more?

Will the Fed increase rates to push down price inflation if unemployment is still high?

One thing for sure, the Fed will ultimately find itself in a trap soon. It will have to practice triage. What patient do you save first? What do you prioritize? Unemployment? Commodity Prices? Stock Market values? And once you choose one of the three to treat first, your actions will adversely affect one or both of the other two.

boatman said...

right there with you on the Fed trap....i feel the world is like an ice skater on a lake in early november or late april.....ooohhh my worst fear, under water with something between me n the air...as soon as my acupuncturist heard that she said "that explains everything"

it is also like steve fossett's plane crash....flying up a valley towards the continental divide to the west, w/east wind--giving you a downdraft that is more than your planes rate of climb, with the ground coming up n not enough canyon width to turn around....and the pilot HE was.

taking the swedish bank model would have helped alot.

gold standard---i can only imagine the cataclysm that would have to happen to get the politicians to give up the printer....but thats what we are talking about here,isn't it?..don't see a way round it, but not sure we get a gold standard out of it....stupid voters n pie in sky politicians....the now generation.

i do read mosler and cullen roche for perspective.....cullen is extremly in tune with dow day to day directions.....i just do not believe the person to twirl the MMT knobs exists or ever will.....humans we are(steve fossett)

and mish,mauldin,financialsense,jesse some...you?

rare spring fog lifts, me n dog in the boat......girl threw a rod again...like clockwork.


boatman said...

oh, i see your blog list.

Jim Slip said...

Misthos, you say that the US has a lot of gold reserves. Agreed. However, if a gold-standard was re-established, it would lose these reserves pretty quickly with it's current (the US economy's) account deficits, so it would be forced to devalue, and so the result would be the same, namely a return to protectionism in order to rebuild domestic production. But you don't need a gold-standard to do that. It may as well happen within the current system, as it probably will.

Misthos said...


You are absolutely correct about the US's current account deficits and how gold reserves in the current situation would quickly deplete as a result.

I just don't see a successful rebalancing under the current system.

So when I say the US will go to a gold standard, I'm saying that will not happen during a period similar to the current state of affairs.

What I am saying is there will be a breakdown of the current global monetary system. The major currencies of the world - the Yen, the Euro, the Pound and the Dollar, all come from countries with horrendous balance sheets. The system worked so long as the Eastern block, the USSR, and emerging world, particularly India and China, were essentially non-existent when it came to global trade, and just as important, oil consumption.

In an increasingly multipolar world, with scarce resources, and enormous imbalances of consumption and debt... the debt based and consumption as a high percentage of gdp paradigm is over.

Nations will never be able to successfully rebalance the world economy so long as they have an easily manipulated paper/fiat currency. Just look at the recent G20 failures in addressing this. They will continue to prefer to manipulate paper money first, so long as they can, and the future be damned.

That's the geopolitical system we live in.

So a collapse, in my view, is certain... even war is a high possibility.

I'm not looking at gold today... I'm seeing gold by default, in a very different world. A new world that is slowly emerging as the old world slowly fades away.

A policy of revalued gold under a new form of gold standard could rebalance the world economy. I have written about this. But that too, would involve a lot of pain. Unfortunately, this seems unlikely to occur. The world will continue functioning under a paper standard, as is, creating the circumstances for a bigger bust, involving greater pain, even possibly war, until gold in some form, is used again. Not by design, but by default.

Paper, or Fiat money relies on trust more than gold does. That trust evaporates in a breakdown caused by a currency or sovereign debt crisis.

Misthos said...

One more thing:

The fact that the central banks of the world have become net buyers of gold is indicative, or a symptom of, the erosion of trust in the fiat money debt based system we have today.

I is a process that is occurring right now. Few people realize this.