> On Sun, 17 Feb 2008 23:35:57 -0600, "Olin" comcast.net> wrote:
>

>>
>>"Cyrus Afzali" wrote in message
>>news:ml1ir35tsn0ikuk4fnq1vhjo57eidf9492@4ax.com...

>

>>> Right, but this has wider ramifications. In the dot-com bust, for
>>> example, companies lost money, some went belly up and investors lost
>>> money when companies died. In this case, financially healthy companies
>>> that need to tap the credit markets for additional capital are finding
>>> it tougher overnight because so much money has been lost by investment
>>> banks that made bad bets on mortgage-backed debt. Most every firm on
>>> Wall Street has taken billions in charges, in some cases more than 10
>>> billion; that's a whole lot of dot-com collapses.

>>>>

>>
>>Granted it's more complicated, but at the essence, no boom ever survives a
>>bust, and the downturn always comes eventually.

>
> Right, but in normal circumstances, it's just a business cycle and the
> harm is relatively small. This could prove to be much, much different,
> at least as it pertains to a few industries and situations.

>>

>

>>>>There's really not a whole lot of difference in flipping houses and
>>>>flipping
>>>>mortgages, which is what a ton of these little brokerages were doing...
>>>>making the loan and immediately selling the paper. That was bound to, at
>>>>some point, leave somebody holding a very large bag.

>>>
>>> It's much more complicated than that. You had firms that have
>>> absolutely nothing to do with mortgages on a daily basis buying up
>>> billions in mortgage-backed debt that went bad. Ordinarily, a purchase
>>> of debt is a solid investment, as long as it's investment grade,
>>> because you're theoretically guaranteed to get your money back, along
>>> with interest. But when the assets backed by that paper, in this case
>>> houses, started declining in value rapidly, things changed for the
>>> worse and fast. Literally, in many markets in the country, you have
>>> people abandoning houses they can no longer afford. When that happens,
>>> those assets that back the paper suddenly plummet in value making the
>>> debt worth much less.
>>>

>>Oddly enough, I have several friends who've made fortunes buying up
>>nothing
>>but bad debt. Number one, far more people would like to pay off their debt
>>than most would believe. Number two, you usually buy it at pennies on the
>>dollar, so collecting anything at all usually winds up as profit and at
>>the
>>very worst, you get a decent write off for that debt you can't collect.

>
> But the debt that was bought up by investment banks wasn't bad debt,
> it was investment grade at the time. It went sour as more people who
> held the underlying mortgages weren't able to pay those mortgages,
> leaving the investment banks that bought that debt with junk in some
> cases. The situation you describe above is much less complicated and
> doesn't really have a big economic impact; it's more akin to gambling
> than anything.
>

> The problem here is compounded by the fact that if mortgage companies
> can't sell the mortgages they write on the debt markets, they can't
> raise money for new loans. That's why everybody knew Countrywide's
> days were numbered when it had to tap the debt markets for money at a
> much higher rate than historically was the case. The spreads on
> mortgages are already pretty thin, so when the cost of the money
> you're lending goes up enormously overnight, it's a death knell.
>

>

>>But, you are entirely correct in noting that the credit markets, coupled
>>with the downturn in home values is driving disaster, especially when, as
>>you also note, companies that have never been in the mortgage business are
>>buying up paper.
>>

>>> Flipping mortgages has been done for ages and ages and ages because
>>> the servicing of mortgages is much more lucrative than the actual
>>> mortgage business. That very business is encouraged by Fannie Mae and
>>> Freddie Mac, since they buy up many of the conforming loans (i.e.
>>> those less than $317K).
>>>

>>Absolutely, but I've not seen it done at the levels of the past few years
>>in
>>a very long time.

>
> That's because the rapid increase in home prices and sales made it a
> very attractive business. People thought there was no way to lose
> buying it up. And, theoretically, they were right since it was
> guaranteed. But when mortgage companies implode overnight, as they
> have in the case of IndyMac and some others, the ripple effect on that
> trade is enormous.
>

>>> Well, NY'ers have long become accustomed to having the most
>>> dysfunctional state government in the country. That's one in the long
>>> list of things that never changes much. Thankfully, it doesn't lead to
>>> harm in any area that really matters except just a bunch of wasted
>>> legislative time and money.

>>
>>It used to be that watching a state government was about the cheapest
>>entertainment one could get. Lot of fussing, cussing and posturing, and
>>relatively little wasted but time. Taxes and fees stayed about the same
>>and
>>they didn't really intrude on anybody's life all that much. Then, for some
>>reason, they got the notion that they could actually do something now and
>>then, and it's turning out to be incredibly expensive, intrusive and
>>wasteful.

>
> You haven't seen crazy till you go to Albany. Here's a state with an
> annual budget that rivals many countries, has a bicameral legislature,
> but is in effect ruled by 3 people. Currently one of them is a crusty
> guy whose biggest accomplishment was a quasi-successful professional
> boxing career who's under a federal investigation. Given that he and
> the governor are barely on speaking terms, it's not hard to imagine
> how nothing gets done. You really couldn't make up a better tale than
> we have right now.
>