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goldminingXpert (29.44)

GMX presents continuing coverage of the mortgage disaster

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May 27, 2009 – Comments (18)

Doom!

GMX is pleased to present the third of an undetermined number of posts tonight and tomorrow about the ongoing collapse of the mortgage-backed security market and the wider mortgage-lending process as a whole.

For this installment, I bring you this post from Mortgage News Daily blog.

Here's the headline:

"Special Report on MBS "Black Wednesday:" Among The Worst Day Of Losses.... Ever...."

Sound bad? Keep reading.The article is techincal--but it is worth reading (twice) if you want to understand the shockwave that is about to smash into the S&P.

 "

Damage Report 5/27/09

The dust is finally settling and ashes finally floating away, at least for today.  We are left with one of the most grotesque images to come out of the MBS marketplace in years: the visual representation of the deservedly named "Black Wednesday."

(All graphics reproduced from their blog)

 

[. . .]

But unlike days past where MBS played the tortoise to Tsy's hare and executed mimetic movements on a smaller scale, today was tsy's day to answer to MBS.  To say MBS were center stage today would be putting it mildly.  First of all, we need to remember that for years now, total outstanding MBS has far surpassed total outstanding tsy debt.  So when something big happens in the MBS market, it can absolutely send shockwaves throughout the entire fixed income sector.  We'll elaborate more later in this post and tomorrow, but today was the story of an MBS snowball that consumed everything in its path, including tsy's, until it reached such a momentum that only the bottom of the mountain was a sufficient backstop.  Thinking of the "mountain" as literally ALL the gains we've had since the Fed started buying, you can see this is a not-unreasonable metaphor given the day over day chart:

[. . .]

From a technical perspective, this was the trigger that coincided with all hell breaking loose today, and unleashing the previously discussed snowball..."

Here's the rest of the blog... it continues at length but I want to make sure they get ad dollars for their fine work.

When the bond market fails to work normally, it must be propped up. How is it propped? Simple, you pull the rug out from under equities and cause the suddenly scared investors to have to seek safety and buy the unwanted bonds.

18 Comments – Post Your Own

#1) On May 27, 2009 at 9:50 PM, GenericMike (< 20) wrote:

I wish I understood what this post meant. :p

 

It seems like a pretty important concept. I just don't understand it. MBSes crashed today(and are expected to continue to crash?) which should cause bond yields to skyrocket which will force the government to stop backstopping the market and let it crash so treasury yields go back down? 

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#2) On May 27, 2009 at 9:59 PM, goldminingXpert (29.44) wrote:

It seems like a pretty important concept. I just don't understand it. MBSes crashed today(and are expected to continue to crash?) which should cause bond yields to skyrocket which will force the government to stop backstopping the market and let it crash so treasury yields go back down?

This is the important stuff. There's a lot more nuance and detail within the article, but you caught the main drift. I quoted it mostly so you would get that, and also partly to highlight the severity of the headline from a blog that always covers this stuff. The source I quoted is a source that always covers mortgages and so their headline is the equivalent of your newspaper screaming in 72 point font:  "Black Wednesday:" Among The Worst Day Of Losses.... Ever...."

Pretty frightening--especially when you realize it is the net result of a flawed policy of a bizarrely disfunctional federal reserve.

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#3) On May 27, 2009 at 10:16 PM, GenericMike (< 20) wrote:

Will certainly be interesting to see how the rest of this week plays out.

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#4) On May 27, 2009 at 11:00 PM, Option1307 (29.73) wrote:

This seems like the prime spot to gamble a bit on TBT and/or TMV...

Thanks again for the continued coverage of the unfolding drama GMX

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#5) On May 27, 2009 at 11:01 PM, xserver (< 20) wrote:

Interesting.  I've browsed around a little bit and there doesn't seem to be any bulls amongst the tops CAPS players.  Perhaps there some I just haven't noticed yet?  It would be strange if they all turned out to be wrong...

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#6) On May 27, 2009 at 11:16 PM, mistermiranga (97.05) wrote:

Just my opinion but the TBT play might be done with for the very short term...a little dicey if the government starts meddling more there to keep things flying, no? I need to get a better grasp on the whole fixed income genre but seems to me that a safer bet might be short equities now...if you believe that the prop job there is over...

good post GMX...

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#7) On May 27, 2009 at 11:26 PM, Option1307 (29.73) wrote:

a little dicey if the government starts meddling more there to keep things flying, no?

This is always a legitimate concern, but the point here is that the current goverment intervention is failing to to "keep things flying".

Thus, it may be time to short the the bubble that the government is propping up, maybe...

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#8) On May 27, 2009 at 11:42 PM, goldminingXpert (29.44) wrote:

Just my opinion but the TBT play might be done with for the very short term...a little dicey if the government starts meddling more there to keep things flying, no? I need to get a better grasp on the whole fixed income genre but seems to me that a safer bet might be short equities now...if you believe that the prop job there is over...

Couldn't agree more. The government will make a move to try to stop the bond decline and it will probably succeed (at least for awhile) while driving equities lower.

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#9) On May 28, 2009 at 10:10 AM, XMFSinchiruna (27.77) wrote:

GMX, Thanks very much for posting this, and for staying on top of these watershed events!

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#10) On May 28, 2009 at 10:25 AM, helicopterfool (30.61) wrote:

Another great post from GMX.  Thanks GMX.

Rick Santelli this morning, "Treasury Dept is telling  the gov't, are you listening Fed? You cant control us". 

 

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#11) On May 28, 2009 at 9:50 PM, jesusfreakinco (28.89) wrote:

China is sending a message before Timmy's visit...

JFC

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#12) On May 29, 2009 at 11:57 AM, portefeuille (99.66) wrote:

 ... and down again ...

chart

You were right in saying that the Fed/Treasury is currently strong enough to keep yields low ...

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#13) On May 29, 2009 at 12:17 PM, russiangambit (29.24) wrote:

JUst as a point of reference. We refinanced  about 2 weeks ago, 15 year at 4.25%. 3 days ago the rate on the same mortgage went to 4.5% and yesterday it went to 4.75%. It is a disater, - 0.5% jump in just 2 days.

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#14) On May 29, 2009 at 7:41 PM, huddaman (98.58) wrote:

gmx, i realize you are calling it a doom situation or bear market rally. i also noted earlier that you are expecting us to come out of all this too, and you are not a person who thinks america is never going to recover.

 

can you advise what will be signs of the recovery. 

with 10yr note rates rising, and along with that mortgage rates increasing, obviously we will not see any housing market improvements for foreeable future. can the economy recovery without housing market rising again?

 

frankly, i feel low housing prices is not a bad situatio at all. sure it means less credit to those who dont have savings to spend for flat screens or vacations or kids college or new kitchen, but it also means lower mortgages for anyone who buys a house in the future. lower mortgages mean more disposable income to buy a car, etc

 

for e.g. if some household makes 100k and buys a home for 400k, then they are spending around 25-30k on housing? however, if the same house is more reasonably available for 250k or200k, then they are only spending 10-15k on housing, that extra 10k-15k can be used to spur the economy, so whoever in the govt thought keeping mortgage rates low so as to keep housing costs irrationably high is a moron (IMO)

 

Also, dwot wrote an excellent article on how a home worth 200k with 10% mortgate interest is better for a homeowner than a home with 400k at 4.25% interest.

(hint: higher interest means more inentive to payoff mortgate and live debt free! also it means more tax deduciton in U.S since uncle sam foolishly allows you to deduct mortgage interest on your taxes thinking that can keep the cost of housing low. ha!)

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#15) On May 30, 2009 at 4:30 AM, alexxlea (62.51) wrote:

Sorry, but the median income is not 100k, but the median home price is still several hundred thousand in the worst hit areas. Do the math. And the problem is not really much to do with rates at all, do you think a 1% rate change matters as much as losing your job with no prospect of getting a job that has equal pay?

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#16) On May 31, 2009 at 1:08 PM, IIcx (< 20) wrote:

rec and a fan GMX but I have to agree with alexxlea -- the "bubble" has taken all logic off the table. At least we could blame the tech bubble on investor greed. This one is absolutely inexcusable. This is Phineas Taylor Barnum, "never give a sucker an EVEN break" and the "bankers" need to go to jail and "never pass GO". 

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#17) On June 01, 2009 at 9:13 AM, DeerHunter73 (72.98) wrote:

879 last push up

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#18) On June 01, 2009 at 6:37 PM, AdirondackFund (< 20) wrote:

Yup.  Another nice pick on the news.  I was going to say something....but it's best to stay quiet at the moment.  Sorry.  $Rifin got shot through the head at about 3:15 PM today.  Haven't seen anything quite like that in awhile.  Related to your other post.  You're right on target.  Interest Rates and Bank Stock are really in for it now. 

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