Countrywide Rises On Federal Subprime Plan. Will It Work?
Below is the chart of Countrywide I posted a year ago this past week citing an Elliott Wave 5 wave count. I'm not necessarily an Elliott Wave advocate or guru but it was confirmed by the fundamentals. Wave 5 is an exhaustion wave portending a change in price direction. In other words, I wrote that Countrywide stock was likely doomed. Recently the price was down about 80% from the date of this post. No great revelation. It didn't take an act of omniscience to see this coming. Well, for some it may have but that's another story. Those people are like puppy dogs and believe good things happen forever. By the way, most investors in stocks fit that bill. Both professionals and well as individuals.
This past week government's central planners announced a plan to save homeowners and Countrywide's stock went up double digits. I've written on here that I am supportive of some type of attempt to keep people from being dumped to the curb by mortgage servicing companies. This is a once in one hundred year event and while doing nothing is the best scenario for the market to cleanse itself, we aren't talking about abstractions or markets as some of the cold-hearted types keep citing. Look, mistakes were made by lenders and buyers. The difference is that lenders who approved these risky practices have pocketed billions of dollars and the Fed is willing to bail them out. So, when people's livelihoods are at stake, I think an attempted act of decency isn't unrealistic. Would you want to spend Christmas in a homeless shelter? A possibility for some. Now, if some investors believe this is a breach of some type of contract and want to sue to stop this plan, well, I support them as well. That may sound contradictory but not really. I support the free markets but I also support an attempt to mitigate significant human crises be it plague, flood or the biggest real estate crisis in the history of the world.
But, the real reason government is acting isn't going to be discussed because it would create a panic. The real reason i s because government officials finally realize what I've been blathering about since starting this blog: one of the outcomes of this cycle is an extremely high risk for a serious banking crisis and the financial system cannot absorb this type of shock. Absorbing this shock could ensure we actually do have a banking crisis. Don't believe anyone outside of the U.S. is safe because nearly every country has similar or larger real estate messes. Actually, I am more confident than ever emerging markets are the biggest messes. And, not just real estate. Let's digress a bit. "Emerging markets" is a phrase scammed up by Wall Street to describe those markets that are corrupt, opaque, without risk controls, with banking systems made of toothpicks and the like. Before they were called emerging markets, they were simply undeveloped economies. Economies that may never develop. That doesn't have the cache to convince you to invest your hard earned dollars so that Wall Street could make even more money. So, some spinmeister created the term "emerging markets". Now, we hear emerging markets are in great shape because of the currency reserves they've built. Hahahahaha. Dream on. Anyway, back to the comments about the banking system. Before you get on your moral hazard soapbox, realize the government is likely to get involved in trying to fix alot of "stuff" before this is all finished. That is both good and bad. Good because they will attempt to mitigate outcomes and bad because they will attempt to mitigate outcomes. How's that for circular reasoning?
But, will this housing plan work? Most definitely not to any large degree. And it will almost surely drag the mess out for a longer period of time. But, I suspect this is also part of any plan. The thinking is probably that if the mess is dragged out, there is some chance the economy will recover and the scope of this mess won't fully develop. Nice idea. Likely just the opposite will happen. Yet it's worthwhile to try something on a smaller experimental scale as this plan does. The biggest problem is the law of unintended consequences. As I wrote before, what is good for homeowners will be bad for banks. If it's bad for banks, it will ultimately be bad for homeowners. More of that circular reasoning? In other words, many actions could and will make the economic situation worse. Depending on go forward actions, the situation could likely get much worse because of intervention. But, it's going to get worse anyway. Am I making any sense? Not really. But, it fills up space.
What are some housing options discussed that would cause the least amount of pain to the economy? A 90 day freeze on foreclosures as espoused by some? Very, very, very bad for the economy as it could start an immediate and rapid economic tailspin by restricting all forms of economic credit even further. Banks would lend even less with an increasing nonperforming loan portfolio and the credit ratings agencies might actually do something like reduce bank credit ratings. Now, I realize it is hard to believe credit rating firms might actually do something given their incompetence this cycle. How about freezing rate increases for five years as Paulson is advocating? Again, this has a side effect of restricting credit. But, as I understand it they are targeting a smaller segment most worrisome for government officials. Those lured, and often using lecherous practices, into teaser rate mortgages. Likely less credit restrictive and depending on how they do it, maybe little impact on credit. We also have Robert Toll of Toll Brothers home builders out this week telling us that a better plan would be to allow Fannie Mae and Freddie Mac's limits on mortgages go to over $700,000 instead of approximately $400,000 today. What would that do? Amongst other things, it would leave quasi-government mortgage agencies holding more deflating mortgages in the most expensive and overheated markets. And allow more mortgages to be written on upside down property values that will likely leave buyers with negative equity for years to come. So, it would likely create more consumer duress and more bad debt.
So, here's something to think about. Long term mortgage rates in Japan have been in the 3%-ish range for quite some time. Should the U.S. have a Japanese style deflation, what impact would those rates have on the housing market and all of the expected resets to much higher rates that nearly everyone is expecting? Here's my point. If the powers that be would just sit tight and allow the markets to work, would some of this take care of itself? Would the markets accomplish what their fiddling is attempting to accomplish? Reduced demand and falling prices would translate into a free market response that would end up with..................lower rates. And, wouldn't that also help other home owners who would be given an opportunity to refinance at lower rates? What are central planners trying to do? Impact that same outcome. Just something to consider.
What the central banks, business and politicians need to do is find solutions that might be less credit restrictive or actually increase credit availability with the least amount of unintended consequences. In this environment, that is nearly impossible in my estimation. As I've said, it's all in the soup and the soup is already made. Now, we watch the global consequences of this cycle's stupidity.
This past week government's central planners announced a plan to save homeowners and Countrywide's stock went up double digits. I've written on here that I am supportive of some type of attempt to keep people from being dumped to the curb by mortgage servicing companies. This is a once in one hundred year event and while doing nothing is the best scenario for the market to cleanse itself, we aren't talking about abstractions or markets as some of the cold-hearted types keep citing. Look, mistakes were made by lenders and buyers. The difference is that lenders who approved these risky practices have pocketed billions of dollars and the Fed is willing to bail them out. So, when people's livelihoods are at stake, I think an attempted act of decency isn't unrealistic. Would you want to spend Christmas in a homeless shelter? A possibility for some. Now, if some investors believe this is a breach of some type of contract and want to sue to stop this plan, well, I support them as well. That may sound contradictory but not really. I support the free markets but I also support an attempt to mitigate significant human crises be it plague, flood or the biggest real estate crisis in the history of the world.
But, the real reason government is acting isn't going to be discussed because it would create a panic. The real reason i s because government officials finally realize what I've been blathering about since starting this blog: one of the outcomes of this cycle is an extremely high risk for a serious banking crisis and the financial system cannot absorb this type of shock. Absorbing this shock could ensure we actually do have a banking crisis. Don't believe anyone outside of the U.S. is safe because nearly every country has similar or larger real estate messes. Actually, I am more confident than ever emerging markets are the biggest messes. And, not just real estate. Let's digress a bit. "Emerging markets" is a phrase scammed up by Wall Street to describe those markets that are corrupt, opaque, without risk controls, with banking systems made of toothpicks and the like. Before they were called emerging markets, they were simply undeveloped economies. Economies that may never develop. That doesn't have the cache to convince you to invest your hard earned dollars so that Wall Street could make even more money. So, some spinmeister created the term "emerging markets". Now, we hear emerging markets are in great shape because of the currency reserves they've built. Hahahahaha. Dream on. Anyway, back to the comments about the banking system. Before you get on your moral hazard soapbox, realize the government is likely to get involved in trying to fix alot of "stuff" before this is all finished. That is both good and bad. Good because they will attempt to mitigate outcomes and bad because they will attempt to mitigate outcomes. How's that for circular reasoning?
But, will this housing plan work? Most definitely not to any large degree. And it will almost surely drag the mess out for a longer period of time. But, I suspect this is also part of any plan. The thinking is probably that if the mess is dragged out, there is some chance the economy will recover and the scope of this mess won't fully develop. Nice idea. Likely just the opposite will happen. Yet it's worthwhile to try something on a smaller experimental scale as this plan does. The biggest problem is the law of unintended consequences. As I wrote before, what is good for homeowners will be bad for banks. If it's bad for banks, it will ultimately be bad for homeowners. More of that circular reasoning? In other words, many actions could and will make the economic situation worse. Depending on go forward actions, the situation could likely get much worse because of intervention. But, it's going to get worse anyway. Am I making any sense? Not really. But, it fills up space.
What are some housing options discussed that would cause the least amount of pain to the economy? A 90 day freeze on foreclosures as espoused by some? Very, very, very bad for the economy as it could start an immediate and rapid economic tailspin by restricting all forms of economic credit even further. Banks would lend even less with an increasing nonperforming loan portfolio and the credit ratings agencies might actually do something like reduce bank credit ratings. Now, I realize it is hard to believe credit rating firms might actually do something given their incompetence this cycle. How about freezing rate increases for five years as Paulson is advocating? Again, this has a side effect of restricting credit. But, as I understand it they are targeting a smaller segment most worrisome for government officials. Those lured, and often using lecherous practices, into teaser rate mortgages. Likely less credit restrictive and depending on how they do it, maybe little impact on credit. We also have Robert Toll of Toll Brothers home builders out this week telling us that a better plan would be to allow Fannie Mae and Freddie Mac's limits on mortgages go to over $700,000 instead of approximately $400,000 today. What would that do? Amongst other things, it would leave quasi-government mortgage agencies holding more deflating mortgages in the most expensive and overheated markets. And allow more mortgages to be written on upside down property values that will likely leave buyers with negative equity for years to come. So, it would likely create more consumer duress and more bad debt.
So, here's something to think about. Long term mortgage rates in Japan have been in the 3%-ish range for quite some time. Should the U.S. have a Japanese style deflation, what impact would those rates have on the housing market and all of the expected resets to much higher rates that nearly everyone is expecting? Here's my point. If the powers that be would just sit tight and allow the markets to work, would some of this take care of itself? Would the markets accomplish what their fiddling is attempting to accomplish? Reduced demand and falling prices would translate into a free market response that would end up with..................lower rates. And, wouldn't that also help other home owners who would be given an opportunity to refinance at lower rates? What are central planners trying to do? Impact that same outcome. Just something to consider.
What the central banks, business and politicians need to do is find solutions that might be less credit restrictive or actually increase credit availability with the least amount of unintended consequences. In this environment, that is nearly impossible in my estimation. As I've said, it's all in the soup and the soup is already made. Now, we watch the global consequences of this cycle's stupidity.
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