Digby wrote:
What part of saying the mortgage market is highly leveraged doesn't make sense? You might not agree, which would seem to fly in the face of reality, but that's a different thing
You mean the ratio of debt to equity is high? Do you have a statistic for that?
Here the outstanding loan to value ratio is listed as just 20% for the housing market as a whole. That's not particularly high. Certainly its clear that those with a mortgage, where it is 46%, do not require an increase in the asset value to pay off the loan. Therefore it is not leveraged speculation. Your argument is false.
You're ignoring how the market raises monies that it lends in the first instance, or it might be you simply don't know how it does that, but I can assure it's leveraged. I'm loathe to set out the following as it seems a bit Roger red hat, but given there's even a query then I'll note the following:
Basically banks/building societies know that those with deposits will want a certain % of their monies, and they can lend the remainder (and frankly the majority). And at basic what the banks retain is their capitalisation. The banks take the assets the depositers aren't expected to want and lend it, whether to retail customers in the form of loans, credit cards, to businesses and of course in mortgages. The thing is if they simply lend the money out for a mortgage and then wait 25 years for the money to be paid back it takes a long time for them to be able to lend that money again and it's deemed not to be working hard enough for them, so they don't do that, instead they make a loan and then sell that loan, and then they can loan out the money they've gotten for selling the loan and that then repeats over and over. Exactly what model the sale of the loan takes will vary, we've seen CDOs (collateralized debt obligations), MBS (mortgage backed securities), REMIC (real estate mortgage investment conduit), SIV (structured investment vehicle) and so on and so on, these (supposed) assets are sold to other institutions and to private investors too, but as so often the whole doesn't look vastly different to a Ponzi scheme, albeit it is a legal one, it's certainly an inverted pyramid. As the sale and lending of the same monies builds one atop the other the entire situation becomes increasingly geared or indeed leveraged. That the whole is so geared, and so many banks all owe money to each other is why back in 2008 once the value of the assets become suspect and the repayment of the loans saw an increase in the failure rates, is why the whole system started to crash so quickly, if the cash doesn't keep moving to lubricate the gears of the mortgage economy then the geared system grinds to a halt.
Some of the assets even have some great names that set out that the assets are geared, though they also seemingly mislead somewhat. There's a famous example for instance from Bear Stearns who had the investment scheme where you could buy debt that was called the 'High Grade Structured Credit Enhanced Leveraged Fund' the high grade post crash turned out to be questionable, the leveraged part wasn't and isn't
Haha thanks for the lecture on mortgage asset securitization... but before you get ahead of yourself, you're starting from a flawed foundation. What I've highlighted here in your post is a description of how you think banking works - you are describing the intermediation of loanable funds model of banking. However that model isn't valid. It rather undermines your post.
You don't need to talk down to me you know - I work in finance. I'm aware of the methods banks use to remove their mortgage loan assets from their balance sheets by selling asset-backed securities. If you'd talked about the securities market I would have understood, but instead you were talking about the mortgage market. They are different markets. And it's indeed due to leveraged speculation in asset-backed securities markets that caused the 2008 crash. Minsky is the key economist who has shown back in the 80s that leveraged speculation causes financial instability.
The 2008 crisis was due to securitization of sub-prime mortgages (and rating misleadingly) - mortgages that could only be paid off by an asset price increase.
Here the outstanding loan to value ratio is listed as just 20% for the housing market as a whole. That's not particularly high. Certainly its clear that those with a mortgage, where it is 46%, do not require an increase in the asset value to pay off the loan. Therefore it is not leveraged speculation. Your argument is false.
You're ignoring how the market raises monies that it lends in the first instance, or it might be you simply don't know how it does that, but I can assure it's leveraged. I'm loathe to set out the following as it seems a bit Roger red hat, but given there's even a query then I'll note the following:
Basically banks/building societies know that those with deposits will want a certain % of their monies, and they can lend the remainder (and frankly the majority). And at basic what the banks retain is their capitalisation. The banks take the assets the depositers aren't expected to want and lend it, whether to retail customers in the form of loans, credit cards, to businesses and of course in mortgages. The thing is if they simply lend the money out for a mortgage and then wait 25 years for the money to be paid back it takes a long time for them to be able to lend that money again and it's deemed not to be working hard enough for them, so they don't do that, instead they make a loan and then sell that loan, and then they can loan out the money they've gotten for selling the loan and that then repeats over and over. Exactly what model the sale of the loan takes will vary, we've seen CDOs (collateralized debt obligations), MBS (mortgage backed securities), REMIC (real estate mortgage investment conduit), SIV (structured investment vehicle) and so on and so on, these (supposed) assets are sold to other institutions and to private investors too, but as so often the whole doesn't look vastly different to a Ponzi scheme, albeit it is a legal one, it's certainly an inverted pyramid. As the sale and lending of the same monies builds one atop the other the entire situation becomes increasingly geared or indeed leveraged. That the whole is so geared, and so many banks all owe money to each other is why back in 2008 once the value of the assets become suspect and the repayment of the loans saw an increase in the failure rates, is why the whole system started to crash so quickly, if the cash doesn't keep moving to lubricate the gears of the mortgage economy then the geared system grinds to a halt.
Some of the assets even have some great names that set out that the assets are geared, though they also seemingly mislead somewhat. There's a famous example for instance from Bear Stearns who had the investment scheme where you could buy debt that was called the 'High Grade Structured Credit Enhanced Leveraged Fund' the high grade post crash turned out to be questionable, the leveraged part wasn't and isn't
Haha thanks for the lecture on mortgage asset securitization... but before you get ahead of yourself, you're starting from a flawed foundation. What I've highlighted here in your post is a description of how you think banking works - you are describing the intermediation of loanable funds model of banking. However that model isn't valid. It rather undermines your post.
You don't need to talk down to me you know - I work in finance. I'm aware of the methods banks use to remove their mortgage loan assets from their balance sheets by selling asset-backed securities. If you'd talked about the securities market I would have understood, but instead you were talking about the mortgage market. They are different markets. And it's indeed due to leveraged speculation in asset-backed securities markets that caused the 2008 crash. Minsky is the key economist who has shown back in the 80s that leveraged speculation causes financial instability.
The 2008 crisis was due to securitization of sub-prime mortgages (and rating misleadingly) - mortgages that could only be paid off by an asset price increase.
So you want to draw a line between the mortgage and securities markets and ignore where the money for the mortgage market comes from? It doesn't make much sense to me 'cause the one does rather impact on the other, and if one were to remove or substantially alter the model they use to raise funds to lend you'd have to concede and plan for what that does to the mortgage market
kk67 wrote:Let's not forget that when the stock market dips or crashes,.....that money hasn't been lost behind the sofa.
It's gone into someone's pocket.
