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Australia is Facing a “Massive” Wave of House Repossessions; $100 billion sub-prime timebomb
Topic Started: 12 Aug 2014, 02:54 PM (6,296 Views)
Ned Flanders
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miw
15 Aug 2014, 03:55 PM
I've never heard of a loan in the US that, once written, varies based on the FED funds rate. A minority of loans (mainly vanilla ARMS) vary according to the LIBOR which spiked out of al proportion the the Fed Funds rate.
Rates
YearFed Funds RateUS LIBOR 1M
20021.251.86
20031.01.2
20041.751.84
20053.253.34
20065.255.34


When did you say LIBOR spiked all out of proportion to the Fed Funds rate?

Quote:
 
This is irrelevant to your original claim, which was that the increase in the fed funds rate stopped subprime borrowers from being able to service their loans. First, most of those borrowers were not impacted at all by changes in the FED funds rate in terms of what their repayments were.

They were. It started deteriorating in late 2005/2006. You can see why from the table above.

Quote:
 
Second, from the day they took out the loans they were going to be unable to service the loans, so there was nothing the fed could have done to save them.

Rubbish. They were thrown under a bus to protect US money markets. The dollar index was cratering. The Fed rose interest rates to protect the investments of a few rich people, and threw ordinary Americans under the bus in doing so. The irony is that after the GFC, the Fed has kept interest rates even lower than the bubbly rates of 02/03.
Edited by Ned Flanders, 15 Aug 2014, 07:07 PM.
------------------------------
" ... which is that all-too-familiar dynamic in Irish life where people tell lies, cover them up and create all sorts of collateral damage, sometimes spread out over decades, and never take responsibility."
- Alan Glynn
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Sydneyite
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Ned Flanders
15 Aug 2014, 07:06 PM
Rates
YearFed Funds RateUS LIBOR 1M
20021.251.86
20031.01.2
20041.751.84
20053.253.34
20065.255.34


When did you say LIBOR spiked all out of proportion to the Fed Funds rate?
If you really don't know the answer to this question, you should stop discussing anything related to the US housing market, the GFC, and interest rates right now. :re:
For Aussie property bears, "denial", is not just a long river in North Africa.....
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miw
Member Avatar


Ned Flanders
15 Aug 2014, 07:06 PM
Rates
YearFed Funds RateUS LIBOR 1M
20021.251.86
20031.01.2
20041.751.84
20053.253.34
20065.255.34


When did you say LIBOR spiked all out of proportion to the Fed Funds rate?
Cool deflection bro. You deliberately stopped your data series just before the TED spread (spread between 3M LIBOR and 3M treasuries) spiked.

Quote:
 

They were. It started deteriorating in late 2005/2006. You can see why from the table above.

Posted Image
Wrong. As you can see from the Case-Shiller chart, it peaked in Jun 2006 but the crash did not start until Feb 2007, which is almost exactly when the TED Spread spiked.
Quote:
 
Rubbish. They were thrown under a bus to protect US money markets. The dollar index was cratering. The Fed rose interest rates to protect the investments of a few rich people, and threw ordinary Americans under the bus in doing so. The irony is that after the GFC, the Fed has kept interest rates even lower than the bubbly rates of 02/03.

The fed raised rates because inflation was rising. I'll say it a third time. The vast majority of US home loans had their interest rates fixed on the day the loan was made. Changes in the fed rate had absolutely no impact on the obligations of the borrowers. You don't seem to get this fundamental difference between the Australian mortgage scene and the US mortgage scene.

The subprime ARM loans fell over because from the day they were written the borrowers had no chance of making the repayments once the low-repayment period was over (in many cases there were no repayments at all required for the first 12 or 24 months!). The strategy was to flip the house or refinance at a low interest rate at the end of the startup period. Problem is, if house prices did not rise in the intervening period there was no hope of flipping or refinancing and the borrowers were stuffed. No doubt the Fed's actions to some extent determined the timing of the peak, but the peak would have happened come what may, at which time the music stopped and the subprime borrowers were screwed. Because nobody knew who was and wasn't overexposed to subprime, banks stopped lending to one another and the resulting 300bp spike in the LIBOR took out the few poor sods on LIBOR-tied ARMs. All that was required to set this off was house prices stopping their rise. Unless you accept that the rise could have gone on forever, this was inevitable and the crash was baked in by the crazy lending standards and pretty-much independent of what the Fed did, except for timing.

I am no fan of what the Fed did with interest rates in the late 1990s and early 2000s. In my opinion they raised rated for no good reason in the late 90s, and then they over-reacted and dropped them too low in the aftermath of 9/11 which is *one* of the factors that juiced the house price boom. (Probably the more important one was the stupid Bush govt policy which trashed prudential standards.) That is said of course with 20/20 hindsight. At the time people thought Greenspan was a genius. I do not, however believe you can reasonably blame the house price crash and the ensuing credit crunch and the GFC that follow a year later on the FED's interest rate policy.
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Attachments: Case_Shiller_TED_spread.gif (25.23 KB)
Edited by miw, 15 Aug 2014, 08:15 PM.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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Ned Flanders
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Sydneyite
15 Aug 2014, 07:51 PM
If you really don't know the answer to this question, you should stop discussing anything related to the US housing market, the GFC, and interest rates right now. :re:
You must have mistaken me for someone who would take your advice.
------------------------------
" ... which is that all-too-familiar dynamic in Irish life where people tell lies, cover them up and create all sorts of collateral damage, sometimes spread out over decades, and never take responsibility."
- Alan Glynn
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stinkbug
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So, 7 pages of discussion and not one scrap of data or evidence to suggest a massive wave of repossessions coming.
---------------------------------------------------------------

While it's true that those who win never quit, and those who quit never win, those who never win and never quit are idiots.

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Ned Flanders
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miw
15 Aug 2014, 08:14 PM
Cool deflection bro. You deliberately stopped your data series just before the TED spread (spread between 3M LIBOR and 3M treasuries) spiked.
You are shitting me right? 400bps rise from 2002 to 2006 had NOOOOOOOO effect. No, it all went sideways in 2007 after LIBOR spiked to reflect deteriorating delinquency rates. Subprime delinquencies went from 10% in 2005 to 13% in Q4 2006, before the TED spread.
Quote:
 
Wrong. As you can see from the Case-Shiller chart, it peaked in Jun 2006 but the crash did not start until Feb 2007, which is almost exactly when the TED Spread spiked.

Subprime originations crashed in Q1 2006, then recovered, then plateaued in Q4 2006, while delinquencies were accelerating. The TED spread was a response to deteriorating credit conditions.
Quote:
 
The fed raised rates because inflation was rising. I'll say it a third time. The vast majority of US home loans had their interest rates fixed on the day the loan was made.

I thought we were talking about subprime loans. Nice attempt to muddy the waters there. A large portion of subprime loans were ARM or Option-A, with a smaller proportion being Alt-A. Teaser rate terms were often 2 years, so subprime loans would refi every 2 years or so. So if you borrowed in 2002 at 4%, you refied in 2004 at 6% and in 2006 at 8%. It was in 2006 that refis started slowing and delinquencies started rising.

Quote:
 
Changes in the fed rate had absolutely no impact on the obligations of the borrowers. You don't seem to get this fundamental difference between the Australian mortgage scene and the US mortgage scene.

That is true for non sub-prime, although plenty of ARMs were written in prime with teaser rates.

Quote:
 
The subprime ARM loans fell over because from the day they were written the borrowers had no chance of making the repayments once the low-repayment period was over (in many cases there were no repayments at all required for the first 12 or 24 months!). The strategy was to flip the house or refinance at a low interest rate at the end of the startup period.

Yes, and when the Fed Funds rate rises 400bps in 4 years, that becomes progressively harder to do. I think we are saying the same thing, but you seem to want to disagree, so lets keep disagreeing while we say the same thing.

Quote:
 
Problem is, if house prices did not rise in the intervening period there was no hope of flipping or refinancing and the borrowers were stuffed. No doubt the Fed's actions to some extent determined the timing of the peak, but the peak would have happened come what may, at which time the music stopped and the subprime borrowers were screwed. Because nobody knew who was and wasn't overexposed to subprime, banks stopped lending to one another and the resulting 300bp spike in the LIBOR took out the few poor sods on LIBOR-tied ARMs.

I think this is where we disagree. My position is that the 400bp rise from 2002 to 2006 had already crushed sub-prime. The TED spike in early 2007 was just the coup de grace. Delinquencies were already spiking in Q3/Q4 2006, and originations first collapsed in Q1 2006, then slowed severely in Q4 2006. The combination of rising delinquencies and slowing originations caused the LIBOR blowout in early 2007 as banks panicked about interbank liquidity.

Quote:
 
All that was required to set this off was house prices stopping their rise. Unless you accept that the rise could have gone on forever, this was inevitable and the crash was baked in by the crazy lending standards and pretty-much independent of what the Fed did, except for timing.

Technically, any bubble can continue until hyperinflation.

Quote:
 
I am no fan of what the Fed did with interest rates in the late 1990s and early 2000s. In my opinion they raised rated for no good reason in the late 90s, and then they over-reacted and dropped them too low in the aftermath of 9/11 which is *one* of the factors that juiced the house price boom. (Probably the more important one was the stupid Bush govt policy which trashed prudential standards.) That is said of course with 20/20 hindsight. At the time people thought Greenspan was a genius. I do not, however believe you can reasonably blame the house price crash and the ensuing credit crunch and the GFC that follow a year later on the FED's interest rate policy.

Sure I can. Greenspan panicked at the end of the dot-com boom (tech wreck) and cut the Fed Funds rate 500 fucking basis points in two years, spurring the housing bubble, then panicked again when the dollar cratered and traded inflation got out of control and raised it 400 basis points. And yeah, there was Carter's CRA, and Clinton extended it, and the Bush went full retard. But I like to blame Greenspan, whose genius is predicated on the free ride he got from 87 to 99 (Greenspan did nothing, American technology had it's golden age from roughly 86-97). When that was over he was left with only his wits to make decisions, and the results speak for themselves.
------------------------------
" ... which is that all-too-familiar dynamic in Irish life where people tell lies, cover them up and create all sorts of collateral damage, sometimes spread out over decades, and never take responsibility."
- Alan Glynn
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Bardon
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stinkbug
15 Aug 2014, 09:00 PM
So, 7 pages of discussion and not one scrap of data or evidence to suggest a massive wave of repossessions coming.
Thanks for the heads up, I just read the last page and you have saved me the bother of reading any more. Since I now know this is just another one of those many alarmists posts that fade away into the sands of time.
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