Maseratl wrote:
The only way the Zillow venture could have succeeded would have been to have packaged the properties and sold them in tranches to institutional investors. If I understand correctly, that's not what they were doing--plus, IMO they would have need to have gotten them for better deals than they did, in order for that to have worked.
Speaking of tranches, let's think back to subprime, our most recent experience to everything having gone south. Why did the subprime market collapse, is the situation today in any way analogous, and do there now exist mechanisms that would have addressed or prevented subprime back in the day? These are questions that I hope may be useful to ask.
The market collapsed initially due to loan default in the various bonds. Why exactly did homeowners default? There was a range of loans, from real ones, to zero payment until refi, so there was a range of reasons for default, but presumably the lowest-quality loans defaulted first. These were NINJA ARM's, with teaser rates that reset. A big reason for default would have been that the home price did not rise as expected. What about today? House prices continue to rise. How? At least in part because of governmental indirect price support via low rates as set by the Fed. Problem solved.
The next-worst loans may have been those where the rate reset beyond the borrower's payment ability. What about today? Rates don't reset because prime is static and historically low. Problem solved.
How about those situations where the rate is still low, but a borrower has bad circumstances and can't pay anyway. Default. What about today? Foreclosure moratorium. Problem solved.
Other bad loans may have been due to dissolving rental revenue schemes. Today? PPP, etc. Problem solved.
So it looks like things on the individual level have been addressed. Loans used to be made to those who had no business getting one. We are now in that situation but much worse, where everybody is in over their heads everywhere, where there are no qualifying standards for anything, let alone a residential mortgage. The gov will just try to backstop everything. They do it with loans now, but it is just a matter of time before they extend that to everything. They are now talking about doing away with bar exams, engineering certification, medical school accreditation, etc. And they plan to backstop it all with social policy. It will require ever-more intervention, of the type we have seen in the housing finance market.
What about the CDS's and CDO's of subprime? There are still mortgage bonds, they are still rated, and they are still re-packaged and sold. There are CDO's and CLO's, with putatively stricter margin conditions. Now, the thing is corporate debt. This paper is flying everywhere. Do the same corrective mechanisms exist for, or apply to, today's corporate debt? Absolutely they do, with the added backstop of the government actually directly purchasing corporate bonds. It is as though they are the Germans, pensions, etc. of yesteryear, who bought the subprime mortgage CDO's, only the fix is in--they control the quality of the underlying loans! They are more than a direct market participant, effectively buying their own product. They ARE the market.
Will corporate debt collapse under such conditions, even with the announced taper? They put their money where their mouth is, and showed that they were willing to assume their own risk, but are trying to slowly retreat from that position. Since they have no qualms about participating directly in markets, one has to wonder what their new market role will be. Who owns all the corporate bonds, what is their relationship to government, and will the government turn on them, or at least no longer support the bonds through the maintenance of favorable conditions? Who is now underwriting CDS's on corporate debt, and how is it priced? Is liquidity still at a premium?
Many questions. Not looking for a CDS play on corporates, just wondering aloud about the shape of the future.
Tell me you're a lawyer without telling me you're a lawyer.