Monday, September 03, 2007

Econorama continued

I continue to review the mortgage mess with a view of what it might mean to investors. The story gets curiouser and curiouser....we were probably closer to a debt market meltdown than we knew - about three weeks ago $46 billion of short-term paper in Europe need to rollover, and suddenly there were no buyers. On the same day, several billion in the U.S. couldn't find buyers either. Shortly thereafter, Countrywide announced drawing about $11 billion in bank lines because it couldn't sell commercial paper. And, while Countrywide dealt in higher credit risk loans, it also did a large business in strong credit mortgages. So, a key home lender couldn't sell its paper - some, or even most, of which would be very creditworthy.

Here is the part that seems the most curious: wasn't the big problem of S&L's that triggered that series of bankruptcies - and a REAL government bailout (remember Resolution Trust Company?) borrowing short and lending long? Isn't 5, 10, 15, 30 year loans supported by commercial paper an extreme case of borrowing short and lending long?

What remains fuzzy to me is what happens when a very strong credit calls their bank and asks for a mortgage? If weak credits can't find the mortgage they could have, say, a year ago, I don't see that as more than a short term problem. The U.S. savings rate is a long way from where it should be, and if those potential homeowners really want to own a home, they should save until they get a serious down payment. If strong buyers can't get a mortgage, that is a very different problem....

Where is this leading? I've been looking at the homebuilder stocks. They have lost 50% to 75% of their peak value. Calling a bottom is always a difficult task, and generally not worth even trying. On the other hand, one doesn't want to see a further 50% drop after making a purchase, much less a bankruptcy...

If there are any readers out their tracking homebuilders, please post...

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