Beer - It Does a Market Good!October 22, 2012 Posted by: Joe Morgan, CFA
Sleep baby sleep
Now that the night is over
And the sun comes like a god
Into our room
All perfect light and promises
In college I learned the proper way to pour a beer. Bytilting the glass (or plastic cup) at just the right angle, theappropriate amount of froth will build. A beer with no froth isflat and unexciting, while too much froth leaves little room forsubstance.
One of the unfortunate side effects of a rallying market is acontinuous buildup of froth in the form of unwise investments,Ponzi schemes and just plain lazy analysis.
In recent weeks, we've seen two potential signs froth is returningto the markets.
First, the Federal Housing Finance Agency (FHFA), regulator ofFannie and Freddie, announced it will allow the twins to beginmaking 125 percent loan-to-value loans under the Home AffordableRefinance Program (HARP). The press release states, "With theseexpanded refinance opportunities, qualified borrowers whosemortgages are currently owned or guaranteed by Fannie Mae andFreddie Mac will be allowed to refinance those loans."
The word that jumps out is "qualified." Who is qualified to borrow25 percent more than the collateral put up for a loan, assumingexpected cash flow will not satisfy? In traditional consumerlending, the value of collateral is typically at least as much asthe face value of the loan, otherwise the borrower could simply"put" the collateral to the lender and walk away. In fact,theoretically this is exactly what they should do.
A "put" in this case would include filing for personal bankruptcyand starting over - most likely including a home base that is moreaffordable. Why would anyone want to continue paying a mortgage foran asset that is worth less than the face of the loan?
It seems to me this sort of activity only extends the pain and thenumbers seem to back this up. According to data from the Office ofthe Comptroller of the Currency (OCC), 40 to 50 percent of all loanmodifications re-defaulted within 90 days during the course of2008.
Make no mistake, a government refi at 125 percent LTV is nothingmore...Read More