Mortgage Market Week in Review

The economic fundamentals that have come out in the last week or two have all been, shall we say, poor.   Not just in the United States, but England, Asia and other places, the economic reports all show pretty solid evidence that we are either in or heading into (depending on where you are) a recession and that it’s most likely not going to be a short recession but more likely the opposite – a long and painful one.   I’m not going to go into the details of the different reports because it would be too depressing.

Earnings Reports (or shall we say, loss reports?)   I’m going to do something a little different this time.   I’m going to give you the numbers and then later in the e-mail, I’ll tell you who they matched with.   Here’s the numbers:

(oh and these are all just for the most recent 90 days).

Here’s the choices for the companies who made them:

Now for a few thoughts about what’s going on in the equity markets and how that has an impact on the mortgage and real estate markets.   Here’s an overview of it:

1. The mortgage backed securities market is a highly leveraged market.

2. As approximately 5 to 7% (that’s right, it’s only 5 to 7% of all mortgages that are causing this problem) go bad, the value of the mortgage backed securities (also known as Collateralized Debt Obligations or CDO’s) fall dramatically.   Since they are highly leveraged, the investors have to come up with additional cash, typically lots of it.

3. That is, in an oversimplified nutshell, what is causing the significant sell offs in the stock market and the bond market at the same time.  Investors, typically hedge funds, are needing to raise cash and to do that they are selling everything.

Now keep in mind how bonds and mortgage rates work.   They actually move in reverse from each other.   When bond prices go down, bond rates go up and vice versa.

So, when everyone is selling bonds, that sends bond rates (and correspondingly mortgage rates up).   Which creates the reverse spiral that we don’t need.

I’m convinced that if the overleveraged problems that are in the economy and the markets right now were to “disappear” we’d see long term rates drop quite substantially.   That would then encourage more people to step out and buy a new house.   That would in turn improve the housing market which would increase the value of the mortgage backed securities (because less people would be “under water” on their houses).   That would then reduce the need for people to meet margin calls and sell their investments.

See what an incredibly tangled web we have weaved?  (Is that the correct grammar?)   I’m not too much of a betting man, but if I were, I’d bet you that Treasury Secretary Paulson and Fed Chairman Bernanke and their staffs are currently working on trying to break that cycle.   I wish them luck because I don’t know how to break it.

Now, did you guess who had which earnings (losses?)