The GSE book is performing at around 1% seriously delinquent

It’s not just the percent of loans that are subprime vs prime, it’s when those loans were originated. Nationally, the GSE share became very small in 2006 & 2007 and non-agency subprime and AltA loans became about half the market. So, the GSE loans have suffered much less house price decline than the non-agency loans. In Antioch, for instance, my guess is that close to 80% of all the 2006 & 2007 loans are non-agency in Antioch.

Finally, close to 80% of GSE loans had a 20% downpayment.

There are two other errors in your post:

1) It is not the median value that matters, it is the same sale repeat index that matters. You compare median sales value to repeat sales indices. This doesn’t make sense.

2) You first make the point that the subprime loans are in Antioch, not in Tiburon but then claim that GSE paper is also in trouble. Well, your same observation is true for the GSE loans compared to the subprime loans, they are not in the same place.

As it is now it’s too “rational” and as a result we have our neighbors’ failure to abide by the terms of their contracts taking all of the rest of us down.

Balance Sheet Before

Assets Liabilities/Equity

1000 88
12

Balance Sheet After (BK)

Assets Liabilities/Equity

80 88
0 or (-)

These securities can be underwritten and valued by rational parties. But there is NO BID today because all the opportunistic capital is waiting for the next shoe to drop. The only bid is predatory – like Lone Star taking Merrill to the cleaners.

If Treasury has $700BN to BID with, hungry money will come off the sidelines. If the Feds are paying too little, others will overbid. If the Feds are getting everything they’re overpaying (and if managed by folks like Gross this won’t happen). Once markets are again being made, the issue goes away. In all likelihood the taxpayers spend a fraction of the $700BN, but Paulson needs a big number so everyone knows he’s real.

A bigger problem is that just because a $500K mortgage was issued in area X a year ago, it could easily be down more than the home price index. There was appraisal fraud just to make loans happen (or else the appraiser could be blacklisted for future work). The 25% and 75% percentiles move at different speeds than the median house price index.

For this to work, there would have to be a lot of normalization of data which would take a lot of due diligence that was skipped when the mortgage was issued.

These assets need to be priced lower than current market value because we all know loan defaulting and house depreciation will continue, but also their initial values are essentially indeterminate.

The interbank lending market remains in a coma threatening us all, irrespective of what the Dow Jones Industrial Average may be doing on a short-term basis.

As Senior Economist Gordon Sellon of the Kansas City Federal Reserve discussed in his seminal paper “Monetary Policy and the Zero Bound: Policy Options When Short-Term Rates Reach Zero” published in the Fourth Quarter 2003 edition of the Kansas City Federal Reserve’s “Economic Review”, the Federal Reserve should now consider under taking “twist” operations in the open market.

That paper is available here at the bottom of the link:

http://tinyurl.com/4o9a82

A “twist” operation by the Federal Reserve in the current context would consist of the Fed SELLING 3-month Treasury Bills while simultaneously PURCHASING 5-year Treasury Notes. Such operations, applied judiciously, would affect the term structure of various markets in a positive way.

Such “twist” operations are not without precedent. It was performed during the Kennedy Administration:

http://tinyurl.com/524lk5

I urge people to STUDY Sellon’s critical paper at the link provided above to grasp some of the subtleties involved here before engaging in uninformed knee-jerk criticism.

This is not a cure-all, but it is clear that it should be on the short list of our policy options.

Matt Dubuque
mdubuque@yahoo.com