It's a Long Road BackOctober 22, 2012 Posted by: Joe Morgan, CFA
With the bailout deliberations behind us and the plan movingforward, the question for all of us is "what happens next?"Unfortunately, one of the answers came in the form of the nonfarmpayroll release for September which showed a 159,000 person dropfrom the nation's payrolls. Continued significant job losses goingforward could lead to another leg downward in the currenteconomy.
Though the second quarter grew at a pace of 2.8 percent, much ofthat was due to the economic stimulus checks doled out by thegovernment - fleeting support at best. The fact remains that we arein a long-term downtrend in reaction to an over-inflation of thehousing market, exacerbated by the destruction of the mortgagemarket.
Over the last 10 years or so, mortgages have been financedprimarily by off-balance sheet conduits that funded themselves byissuing short-term debt. So, at the end of the day the entity had30-year assets and 90-day liabilities. Beginning in late 2006,investors became scared of a potential bubble burst in the housingsector and began pulling their investments from the housing market.These 90-day liabilities began to go away as investors shied awayfrom them at a reasonable rate. The conduits reacted by downsizing;unfortunately, by that time the entire mortgage market had becomedominated by these same entities which found no buyers for theirsecurities.
A downward spiral of mortgage prices ensued and was aggravated bythe revelation that shifty lenders had made loans that should neverhave been made; and shifty borrowers had taken the same.Eventually, no one wanted to buy these assets and now the chaosensues.
The pipeline that transports capital from those who have it tothose who can afford to pay for it is broken. In the mortgagemarket, this is the off-balance sheet conduit which needs to bereinvented, remarketed and redeployed. The nationalization ofFannie and Freddie is one step of many in this process. The nextstep is deciding what to do with them - a debate that was put onhold last month when the credit markets began to seize up.
I believe it will take 18-24 months, at least, for any semblance ofa mortgage market to...Read More