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The Run On the Banks

Posted by: Chris Palmeri on September 19, 2008

To some long term observers of the mortgage market, the rout on Wall Street isn’t just a shock, it’s absurb. Banks, hedge funds and other investors are dumping mortgage securities at fire sale prices, either because they have to get them off their balance sheet or because they’re just plain scared. But some of these investments now trade at riduculously low prices. Will a bond at 60 cents on the dollar come back? The housing market is bad but will 40% of all homeowners really default? If they do, how much will you really lose?
“Our basic premise is that market pricing is unduly pessimistic,” says Tad Rivelle, who helps manage $27 billion in fixed income securities at Metropolitan West Asset Management in Los Angeles. “It does seem more of a run on the bank.”
A study on MetWest’s Web site illlustrates the potential for recovery of your investment under various scenarious. Let’s say you own a first mortgage on a house that sold for $500,000. The owner defaults, you foreclose. The equity and second loans are wiped out. The house falls in value by 30% and you lose $50,000 in legal fees, interest and property taxes. You’re still going to recover $300,000 or 70% of your loan.
Housing prices will be under pressure “for years,” Rivelle says. But the market has “discounted a severe amount of negative outcomes, massive foreclosures.” Believe it or not now may be just the time to be putting your money into mortgage bond funds.

Reader Comments

Jim D

September 19, 2008 11:40 AM

Unfortunately, the example you give (buying a single mortgage) isn't how MBS's work. If they did, then yes, you'd be right.

Now, I'm no expert on this, but this is my understanding:

But when you buy an MBS, you're getting a slice of a part of thousands of mortgages, and if it's the "non-senior" part, then if the price goes down by 30%, you'll probably end up with zero. That's because the senior (and "super-senior") parts get paid before you do.

So yeah, super-senior MBS's are (probably) undervalued. Senior MBS's (possibly) undervalued. All others are probably overvalued, since they're probably worth zero. Since many non-senior bonds are still holding on their "A" and "AA" ratings, it's a pretty bad time to buy a MBS bond fund, unless they say that they're super-senior only. I'm unaware of one... though I haven't been looking hard.

If I've got this wrong, please correct me.


September 19, 2008 12:12 PM

September 6, 2008 01:21 PM
Once again, Palmeri is using his so called "journalism" to promote real estate sales. The truth is that the real estate market in LA has all but collapsed along with Riverside, San Bernadino, San Diego, Kern County, and surroundings of Sacramento. Palmeri would have you believe the real estate market in LA is immune. This is nothing new. He repeats his old bag of tricks wearing different hats. What is disturbing about Palmeri is his persistent use of so called "journalism" to foist his personal agenda upon BW readers. His dialogue with the real estate agent consisted of "[real estate agent]....whispered to me that she already had an offer that would likely be accepted that day" and other selected fact patterns are meant to create innuendoes that promote real estate as the way to get rich. Palmeri blatantly ignores the unprecedented number of home foreclosures; collapse of BearnStearn and CountryWide; battered and under ICU care are: Merrillynch, Citigroup, LehmanBrothers, AIG, Ambac, MBI, CreditSuisse, CaryleGroup; imminent demise of Fannie Mae & Freddie Mac; and other regional banks failures like IndyMac due to financial market melt-down. Judging his specious story, readers should ask who else besides BW is buttering bread for Palmeri. Perhaps, Palmeri should have bought the second house, the one where "Pretty Women" was written. As readers may recall, the "Pretty Women" movie is a story about a prostitute. Palmeri should watch that movie to see if his life imitates art.

Daja Vu? Not exactly. Since my earlier comments to Palmeri, death has gripped several investment banks and mortgage insurers coupled with unprecedented level of fear decended upon Wall St. According to my best 9 months of recollection, Palmeri has been recommending purchasing real estate investments during that time period. Had readers followed Palmeri's thinking, they would have joined the ranks of BearnStearn, Merrillynch, Lehman, Indymac, etc,etc. As this article shows Palmeri is a genius because of his mathematic skills, astute business judgment, and uncanny ability to predict market trends. Readers wonder why does the brilliant Mr. Palmeri stagnate at BW as a mere writer. To paraphrase Palmeri's last sentence: Believe it or not now may be just the time to place short positions into Palmeri's career at BW.


September 20, 2008 12:48 AM


Visitor X

September 20, 2008 06:55 PM

The market continues to refuse to recognize that we are headed into a financial disaster that could easily last 10 or 20 years. Trillions will be lost. Jobs will disappear on a scale our formerly affluent society did not think possible. Even people who can afford their mortgage payments will abandon their homes in astounding numbers. Asset values will tumble. Anyone who buys assets or asset-backed instruments now is an absolute fool who does not understand that we have arrived at a historic collapse of our spending power. Never forget that the savings rate has been negative for three years running; we are all washed up.

Jim D

September 24, 2008 01:28 PM

5 days, and comments still haven't posted?

Starting to think that I should start blowing off blogs that don't bother posting comments - it limits the conversation.

Jim D

September 26, 2008 12:23 AM

Oh, I get it - the comments were just lost, not deliberately ignored.

Thank you for your interest. This blog is no longer active.



BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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