RSSBank and Mortgage Stock Volatility Signals Disagreement on Mortgage Foreclosure Rate
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If you believe mortgage assets have been overvalued you sell bank and mortgage stocks and are willing to take a small loss to avoid a bigger loss later. But if you believe the assets have been undervalued because foreclosure losses will be less than anticipated when loss reserves were made than you buy bank and mortgage stocks and expect big gains.
I do not know whether mortgage assets have been undervalued, properly valued or overvalued. But the focus on the value of mortgage assets will force mortgage holders and guarantors to take a second look and share the results with their own depositors and investors. The result in the next few weeks will be reduced uncertainty about the solvency or major lenders and their ability to keep lending.
This is positive for construction, especially housing, although there will be a tougher mortgage market for would be borrowers this summer. Within a few weeks, major construction lenders will either have followed IndyMac Bank into oblivion or have restored confidence in their solvency and be more comfortable lending and more able to attract the investment funds to back the lending.
Be prepared for more mini-crisis on the solvency of construction financing lenders as the economy moves past foreclosure notices and into the period of actual foreclosures which establish how much each mortgage is actually worth.
The Federal Reserve Board and Treasury will stay close to this issue. Rumors of insolvency, whether true or not, can quickly lead to the failure of large lenders and make the next rumor more creditable. There is so much real bad news around today that most of us are prepared to believe any rumor of bad news. Federal financial regulators may have to issue government guarantees or take equity stakes to get the economy through this chaotic period. If they do this right without providing new reasons to panic, the guarantees will never have to be used.
Member Comments
Thanks GT! this is the right interpretation of the June housing report
Fantastic analysis Jim! Very on the point!
June housing starts and permits both Jumped more than expected 9% and 11% comparatively speaksing. However, don’t let these numbers fool your readers! The reality is much weaker than the numbers show. Excluding Northeast multifamily acivity (due to building code changes July 1 there is a major rush in that region) Total permits rose less than 1% and starts actually fell 4%. The key in the June numbers is single-family permits which fell 3.5%. This is a one year low and a trend that will remain firmly downward due to new home …
