I shorted your house

Just sign here

I didn’t, but traders at Lehman Brothers did, even as Lehman itself was peddling mortgage bonds as sure-fire investments. Now the shorts are back, under a different name, buying up those same bonds at a discount and earning money. Nothing wrong with that – these guys were right in 2006 and if they believe the housing market has bottomed and want to put other people’s money back in it, good for them. There remain some risks though if I know my Washington, we taxpayers are going to end up subsidizing the bonds, again, and making these guys richer. That’s my guess, anyway.

Yet the tide could turn again and wipe out investors. Chief among the risks is Europe: the Continent’s banks still hold a significant amount of United States mortgage securities, and if they are forced to sell assets, it could wreak havoc on the market.

Washington is a question mark, too. If banks have to pay for loans they issued under dubious circumstances, it would be a home run for investors, who could receive full payment for a mortgage in a security they bought at a discount. But if borrowers whose houses are worth less than their mortgages are able to reduce their principals on a large scale, bond investors could suffer because the securities would be worth even less than they paid.

“As a money manager, you can’t close your eyes to that potential outcome,” said Jeffrey Gundlach, a founder of DoubleLine Capital, who has been buying mortgage securities since 2008. “To believe that this time we are really out of the woods and the prices will not drop again is dangerous. People made that argument a year ago.”

The mortgage bond market is a very different creature than it was before the financial crisis. For one, it is much smaller: very few residential mortgage-backed securities have been issued since the crisis. The market, at $1.3 trillion, is half the size it was at its peak and shrinks by an estimated $10 billion every month.

5 Comments

Filed under Uncategorized

5 responses to “I shorted your house

  1. Out Looking In

    I was waiting for you to put this up Chris. As usual, what the NYT and otehr financial oress FAIL to mention is that Heir Bernanke, aka “The Bernank”, in order to keep the printing presses running triple overtime, has EXPLICITLY stated that he is salivating and champing at the bit to enter the mortgage market and use the Fed balance sheet to go on yet another tax-payer funded buying spree. These Wall Street wizards are simply front running the Bernank, knowing that they have an eager buyer with an unlimited wallet to off-load these pieces of paper onto. This is simply another case of Pavlov’s dog following its master.

  2. AJ

    “(Reuters) – A report this week showing rampant foreclosure abuse in San Francisco reflects similar levels of lender fraud and faulty documentation across the United States, say experts and officials who have done studies in other parts of the country.

    The audit of almost 400 foreclosures in San Francisco found that 84 percent of them appeared to be illegal, according to the study released by the California city on Wednesday.” Source:
    http://www.reuters.com/article/2012/02/17/us-usa-housing-defaults-idUSTRE81G04M20120217

  3. Anonymous

    Read this and weep: 84% of San Francisco foreclosures from 2009-2011 where reported to have “problems”. This makes me sick to my stomach, I have a neighbor who bought a house out of a foreclosure flip and they’ve spent tons of money updating and upgrading since they bought it two years ago, what happens if the stupid politicians want to give it back to the old neighbor who hadn’t paid the mortgage in a year? The bank foreclosed, a flipper bought it on the courthouse steps, and my neighbors bought the house from him about six weeks later. What happens to them? I’m just shaking my head over this.
    http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2012/02/16/MN691N857R.DTL

  4. Anonymous

    @AJ, I linked to the source article for Reuters and AP’s coverage but I’ll include the important paragraph here.

    “While the study was limited to San Francisco, there’s no reason to believe similar problems wouldn’t be found elsewhere in the state, said Ting, who is a Democratic candidate for the Assembly seat now held by the termed-out Fiona.”

    Of course, Mr. Ting’s concern didn’t arise until he was running for State Assemblyman. His cause has now been taken up by our very ambitious State AG, Kamela Harris, who didn’t seem to have a problem with things while she was City/County Attorney for San Francisco.

    Ms Harris should tread lightly with her ambitions though because our Lt. Governor Gavin Newsom (former Mayor of SF and shirt-tailed relative of the “great” Nancy Pelosi) has his own eye on the Governorship. Meanwhile, our current Governor Jerry “Moonbeam” Brown is staking his legacy on high speed rail.

    I could just weep.

  5. Anonymous

    Oh jeez, Chris, when you see this would you please close my italics at the end of the bolded line? Otherwise, I think any further comments in this thread will end up being italicized. Sorry.